32nd LEGCO REPORT TO HKSA COUNCIL By Hon. Eric K.C. Li

I.    Highlights

To present this report orally.

II.   Committees and Panels

1.   Public Accounts Committee (PAC):

On 26 November 2003, the Director of Audit tabled his Report No. 41 in the Legislative Council.  The Report No. 41 contains 9 chapters.  The Committee has just started to hold public hearings to receive evidence from Controlling Officers.  I intend to present the PAC Report No. 41 to LegCo on 18 February or 25 February 2004.

On a separate note, I wrote a letter to the Chief Executive (CE) on behalf of the PAC, concerning the choice of the newly appointed Director of Audit.  The intention is to establish a spirit of professionalism and to make a strong point about the importance of independence of this office.  The matter has been very widely reported and Council’s views are welcome.

2.   Financial Affairs Panel:

The Panel held 6 meetings including: 1 special meeting to receive a briefing by the Financial Secretary on the Hong Kong's Economy and the Management of Public Finances; 2 special meetings to receive a briefing by the Administration on the arrangement on the Hong Kong Harbour Fest to date and the relevant agenda are attached as Appendix I.

On 29 October 2003, the Financial Secretary (FS) has provided the Panel with a briefing to explain the fiscal management philosophy that he unveiled on 22 October 2003.  He announced the target of balancing the budget by 2006-2007 would be delayed for two years and that starting from 2004-2005 government spending would be cut by 11% over five years, at an average of 2.5% a year.  He defended his economic strategy, saying he was not waiting for luck to revive the economy.  The outline is closed to the comments I made publicly before hand although I am still critical of the pace of his costs control.

A proposed list of future agenda items is attached as Appendix II for reference.  I shall follow up on the issue of accrued accounting prior to his Budget speech in March 2004. 

3.   Economic Services Panel:

The Panel held 3 meetings since the last report.  The Panel studied the progress report on the Global Tourism Revival Campaign, the progress update on Hong Kong Disneyland and the Post Office – Delivery Beat Review.

It also discussed the 2003 Interim Review of the Scheme of Control Agreements with the two power companies, the guidelines to maintain a competitive environment and define and tackle anti-competitive practices promulgated by the Competition Policy Advisory Group.

4.   Information Technology and Broadcasting Panel:

The Panel held 4 meetings to date.

The Panel discussed the consultation paper on draft merger guidelines for Hong Kong telecommunication markets, the proposal to host the International Telecommunication Union TELECOM WORLD 2006, as well as the public consultation paper on 2004 Digital 21 Strategy.

It also receive a briefing by the Secretary for Commerce, Industry and Technology on workplans and initiatives within the purview of the Communications and Technology Branch, discussed the building of a digitally inclusive information society and related issues, the Capital Works Reserve Fund Head 710 Computerization Subhead A007GX-New administrative computer systems, “Introducing Digital Terrestrial Broadcasting at the right time”: a second consultation as well as the broadband Internet services.

5.   Finance Committee and House Committee:

There was 3 meetings of Finance Committee and 10 meetings of House Committee.  TD of HKSA were kept informed of progress on all Bills on a weekly basis. 

The introduction of Government Bills in the current legislative session (2003-04) dated 8 October 2003 is attached as Appendix III. 

III. Bill Committees Joined

1.   Inland Revenue (Amendment) Bill 2000

The Bills Committee had been held in abeyance for over two and a half years since March 2001.  On 24 October 2003, the House Committee agreed that the Bills Committee should resume the scrutiny of the Bill and the draft Committee Stage amendments (CSAs) proposed by the Administration after 2 rounds of consultation undertaken in 2001 and 2002 with the industries, professional bodies, the Securities and Futures Commission and the Hong Kong Monetary Authority.

There were 2 meetings held since the last report.  In the recent round of Bills Committee, little opposition in principle was raised against the heavily amended bill.  The discussion is expected to be smooth though the bill, if enacted into law, would be seen as adding much complexity to the law with little practical value.  HKSA has also submitted a last minute reply with regard to the source principle on royalties.

2.   Companies (Corporate Rescue) Bill

At the House Committee meeting on 7 December 2001, the Bills Committee recommended that the scrutiny of the Bill should be held in abeyance to allow time for the Administration to conduct consultation on, and work out the details of, a new proposal based on ideas initiated by myself and refined by HKSA.  The House Committee agreed to the Bills Committee's recommendation.

At the meeting on 3 October 2003, the Bills Committee informed that the Administration had recently issued a consultation paper on the proposal (the Trust Account Arrangement under the Companies (Corporate Rescue) Bill) to the parties concerned.  We are still waiting for the results of the consultation.

3.   Bills Committee on Deposit Protection Scheme Bill

There were 8 meetings held since the last report.  The objectives of the Bill are to provide for the establishment of a mandatory Deposit Protection Scheme (DPS) for the purpose of providing compensation to depositors under specified circumstances, a DPS Board and a DPS Fund; to provide for contributions to the Fund for the entitlement to and payment of compensation from the Fund; and to provide for incidential and consequential matters.

The Hong Kong Monetary Authority (HKMA) would be the executive organ of the DPS Board.  The costs and expenses incurred by MA would be paid out of the Exchange Fund (ExF) and ExF would in turn be reimbursed by the DPS Fund.  HKMA would also be the authority to decide when compensation is to be paid from the DPS Fund.  The DPS would be mandatory.  The DPS Fund would be accumulated from contributions from the banks.

The Financial Affairs Panel was consulted on the legislative proposal at its meeting held on 6 January 2003.  While Panel supported the proposed DPS in general, some members expressed the following concerns:

(a)  The proposal to exempt an overseas bank that has a comparable scheme in the bank’s home jurisdiction that protects deposit taken by its Hong Kong office would encourage depositors to move their deposits to overseas banks;

(b)  As contributions towards the DPS Fund would be based on the “CAMEL rating” of banks, lower rates banks might be forced to undertaken businesses with higher risks in order to recover the higher cost involved;

(c)  There would be the problem of moral hazard associated with the scheme and banks might increase charges to customers to recover the cost for the scheme; and

(d)  The proposal of appointing Hong Kong Monetary (HKMA) as the agent for day to day administration of the scheme would undermine the credibility and independence of the scheme.  There would be conflict for HKMA as the regulator of banks to take up the role.  In the event of a large bank failure, HKMA might not be able to deploy adequate staff to take up the necessary duties.

The Bill signifies an important step in the protection of deposits.  It may also alter the legal and business environment in which the banking industry operates.  I am also concerned that the related costs might inevitably be passed onto the consumers in way of fees and charges.  The small depositors will be hit the hardest.

4.    Bills Committee on Companies (Amendment) Bill 2003

There were 8 meetings held since the last report.

The Bill seeks to amend provisions in the Companies Ordinance (Cap. 32) (“the Ordinance”) which relate to (i) prospectuses; (ii) group accounts; (iii) overseas companies and incorporation procedures; and (iv) shareholders’ remedies.

The Bill proposes to amend the Ordinance in various areas, including:

(a)   the regulation of the scope, application, contents, registration, amendment, construction and the advertisements of prospectus;

(b)   the requirements for the contents and form of a company’s balance sheet and profit and loss account and the contents of group accounts;

(c)   the regulation of the management, registration of charges, publication of accounts and filing of annual return etc. of a non-Hong Kong company and provisions relating to the incorporation procedures of a company; and

(d)   the rights of a member of a specified corporation to bring or intervene in proceedings before the court on behalf o the specified corporation and inspect the records of a specified corporation.

At the meeting of the LegCo Panel on Financial Affairs on 7 April 2003, the Administration briefed Members on the proposed amendments to the Ordinance to facilitate offers of shares and debentures, enhance shareholder remedies, define “subsidiary” for the purpose of group account, enable electronic incorporation and the update the provision on partner limit.  At the Panel meeting, Members raised the following the concerns and request:

(a)   checks and balances to be put in place to prevent abuse of shareholders’ access to company records;

(b)   protection for investors against misleading or false information disclosed by companies on their business and performance in its marketing materials;

(c)   propriety of the approach of making reference to company laws of different overseas jurisdictions; and

(d)   to facilitate Members’ scrutiny of the Bill, Members urged to Administration to provide comparison between the legislation of overseas jurisdictions and the present proposals when introducing the Bill into the Council.

HKSA made a written submission to the Bill.  HKSA expresses concern about a number of provisions of the Bill, in particular those relating to Schedule 3 – Enhancing the registration system for oversea companies, etc such as sections 333-333B Provisions relating to authorized representative, section 337A Provisions relating to notice of liquidation proceedings re. non-Hong Kong companies as well as Schedule 4 – Enhancing shareholder remedies such as section 152FA-152FC Order for inspection of a corporation’s records by its members.  Detailed comments on the Companies (Amendment) Bill 2003 is attached as Appendix IV.  

The Bills Committee is now proceeding with the clause-by-clause examination of the Bill.  In addition, I am also contemplating some possible amendments which might enhance the governance and check and balances between the Government and the SFC.

V.    Motion Debate

List attached as Appendix V.  In addition, I have written a ‘Letter to Hong Kong’ regarding ‘Who Represent the Middle Class’ on 26 October 2003 for the RTHK.  The speech was published in the November LegCo Column of the Hong Kong Accountant.  I have also made another important speech on ‘democratic reforms’ on 3 December 2003.  I intend to place it on the web-site soonest.  Other speeches on my Web Page and highlights will be published in my circulars to members.

VI.   Questions

I have asked 2 questions: the impact of China’s accession to the Treaty of Amity and Co-operation in Southeast Asia and the setting up of China-ASEAN Free Trade Area on Hong Kong; Research grant applications received by Hong Kong Research Grants Council since the last report which are attached as Appendix VI.  The relevant HKSA Committees may wish to be advised and to consider the replies further. 

VII.  General Political Background

To present this Report orally.

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