HKMA Raises Expectations for Bank Codes of Conduct

Codes of Conduct should include provisions to address conflicts of interest, promote a culture of accountability and encourage staff to report unethical practices.

The HKMA (Hong Kong Monetary Authority) is consulting the banking industry on proposed revisions to the SPM CG-3 “Code of Conduct”, a statutory guideline issued under the Banking Ordinance.

The SPM sets out the minimum expected standards for banks to adopt in respect of their Codes of Conduct and elements of an effective system for enforcing the Codes.

The revisions include a new module on the application of the SPM, saying it applies to all branches and subsidiaries of locally incorporated banks. Overseas incorporated banks may adopt a group level Code of Conduct if it is deemed consistent with the HKMA’s requirements, or otherwise “equally effective” in promoting good conduct and ethical behaviour.

“The Code of Conduct should reflect the professional standards and values that promote ethical and responsible professional behaviour among the AI’s staff and guide them in the discharge of their duties,” the revised document says. “The Code of Conduct should also articulate the acceptable and unacceptable behaviour, and clearly disallow behaviour that could result in the AI engaging in any improper or illegal activity.”

Specifically, the revisions highlight expectations for the Code of Conduct to include provisions to address conflicts of interest, including a requirement for staff members to make a declaration anytime they become aware that they or any of their close family members have “performed any role or taken any action” that poses risk of a conflict of interest arising with the bank.

“The declarations should clearly state the relationship between the staff member concerned and their related parties, as well as the circumstances leading to potential conflicts of interest,” the revised SPM says.

New staff members, and incumbent staff members taking up new roles, are also required to make a declaration to the bank if any potential conflicts of interest are apparent. “To ensure information previously submitted is updated, staff should also make declarations at least annually,” the SPM says.

In addition, staff members with access to sensitive customer information shall be required to declare whether they have any private investments or hold any position that may give rise to conflicts of interest.

In the event of a breach or potential breach of the Code of Conduct, staff should be required to report such activity, and be subject to disciplinary action for a failure to do so “in a timely manner”.

“Staff should also be encouraged to report unethical or questionable practices even if they are legal,” the revised SPM says. Reporting channels should be designed to allow staff to communicate without the risk of reprisal or fear of adverse consequences such as “bullying or retaliation”.

To “promote culture of accountability”, the SPM says, banks should consider having mechanisms in place setting out the consequences for staff engaging in unacceptable behaviour. The revised SPM includes ‘adjustment to variable remuneration’ as one of the possible disciplinary actions banks may specify in their Code of Conduct.

The revised SPM also enhances the role of senior management oversight in implementing the Code of Conduct, and fostering and maintaining ethical standards and expected values set by the Board throughout the bank. Senior management must also appoint a Code of Conduct officer, and ensure the Board is kept regularly informed of any material matters relating to the Code’s implementation.

Banks should also maintain systems and controls to ensure staff members comply with the Code of Conduct, including to define escalation procedures. They should also include in any review of non-compliance an assessment of whether any deficiencies exist in risk management and control systems that require remediation.

“AIs should have sufficient control in addressing actual conflicts of interest as well as in avoiding potential conflicts of interest,” the revised SPM says. “They should have a set of written policies that identify the relationships, services, activities or transactions of the AI in respect of which conflicts of interest may arise, and sets out measures for preventing or managing these conflicts.”

The revised SPM, available here, is open for consultation until 9 April 2021.

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