Notes on Certificate Course (Postgrad.) in Banking, Corporate and Finance Law: Law and Regulations for Private and Retail Banking (Hong Kong, Asia-Pacific), in the University of Hong Kong, First Semester of 2014.

1. LAW & REGULATIONS FOR PRIVATE AND RETAIL BANKING
Certificate Course (Postgrad). Banking, Corporate and Finance Law
THE UNIVERSITY OF HONG KONG
7 February 2014 – 2 June 2014.
I. Introduction to Corporate Governance & Regulations within the Banking-Financial
Services Industry
Classification of Banks, Dimensions of Financial Services (FS):
Banks (of the Banking Industry in itself) in Hong Kong (HK), they can be stratified into different layers:
1. Private Banking [average participation/ client], +US$3M;
2. Private Clients [avg. part./ client], US$1-3M;
3. Premium Services [avg. part./ client], HK$1-2M;
4. Commercial Mass Affluent (Upper edge) [avg. part./ client], HK$200-300K;
5. Commercial Mass Affluent (Lower edge) [avg. part./ client], HK$200K or less.
4 Dimensions in FS. Retail Clients vs. Private Clients:
· Regulations: + Stringent - Stringent
· Sales: + Transaction + Portfolio
· Purpose: Basic Advanced
· Investment: Limited Diversified
About Professional Investors:
Term defined under Securities and Futures Ordinance (SFO).
Professional investors can be:
· Institutional: Banks, Insurers, MPF admin., Exchange houses, etc.;
· Individuals: Persons, Advisors, Trustees, Partnerships, among others…
To be an individual professional investor, under the SFO:
· Investment portfolio (account) has to be equal or superior to HK$8M;
· Total assets should be equal or superior to HK$40M.
Between both requirements, these have to go together.
Across different regions in the World, average participation/ by portfolio of HNW professional [billionaire]
investors (super-rich bank users), which exceed +US$1M per portfolio/ investment account, we can find
the following figures:
· In North America: 3.4M participants;
· In Asia-Pacific: 3.3M participants;
· In Europe: 3.1M participants.
By 2020, 3.7M billionaires are expected (in North America).
The Asia-Pacific region has accounted for approx. 50% of global wealth growth. The US. of America has
been the top contributor of global wealth, whereas the PR. of China follows afterwards.
Outlook within the Wealth Management (WM) Market:
To this date, there are 6 principal challenges that the WM Market has to deal with:
1. Higher cost-income ratio;
2. Changes of investors’ demands:
· Capital-preservative products;

2. · Weakened trust;
· More choices of funds;
· More technologically-savvy;
· Diversification and protection.
3. Tighter regulations and compliance schemes in place;
4. Increased technology and back-office costs;
5. Rise in boutique WM firms, shadow banking and widespread consolidation;
6. Are there any tax havens anymore?
In summary, the diversification of services and providers has expanded, while networks and regulatory
schemes have become tighter;
As matter of fact, the bank secrecy law enforcement is an important and determining factor.
II. Corporate Governance in the Banking Sector
Definition of Corporate Governance:
Generally, refers to structures and processes for the direction and control of companies;
Comprises management framework, relationships between and among the board of directors,
shareholders, and even stakeholders;
Its goal is to provide sustainable economic development to companies, in order to enhance their
performance and increase their access to outside capital.
[Definition by the World Bank.]
Corporate governance is important to maintain organizational, operative and business integrity, keep the
chain of command in good order.
The following elements are necessary to ensure healthy corporate governance:
· Business ethics is an important factor;
· Transparency is CRUCIAL;
· Team segregation and specificity of roles.
According to OECD standards, also refers to management relationships, processes and frameworks
(similar view to the World Bank).
The principles of corporate governance according to OECD are:
· Effectiveness;
· Disclosure and transparency;
· Responsibilities of the board;
· Roles of stakeholders;
· Business sustainability.
Among relevant standards, frameworks and codes for purposes of studying this concept in Asia-Pacific,
we have:
· The UK Corporate Governance Code, which provides guidelines, good practices and a solid markets-based
approach;
· The Hong Kong Listing Rules, the HK Monetary Authority Supervisory Policy Manual.
Corporate Governance in Finance and the Financial Crisis, Challenges:
Why was the 2008 Crisis caused?
Among the main factors and causes, we have the following:
· Poor risk management;
· Inadequate disclosure and transparency models;
· Agency (authorities) issues;
· Inappropriate model of bonuses and competitive packages;
· Financial Systemic effect (the “system fell down”), due to flaws and failures in the integrity of the system
as a whole: markets, providers and regulators.

3. [Systemic is not the same as systematic].
This way, big corporations such as Lehman Brothers and JP Morgan, fell down because the Financial
System collapsed (the dominoes fell), which led them to bankruptcy.
Fortunately, by the year of 2013, there have been substantial improvements in Financial Corporate
Governance, especially regarding the following points:
· Company management strategies, and risk management;
· Compliance: legal, regulatory, principles and internal policies;
· M&A, reorganizations and restructurings;
· Diversification of team-roles and specialization;
· Improvements in effective (material and human resources) management, from the board of directors to
the lower levels of management hierarchy: such as risk assessment, remuneration systems, management
structures;
· Last, but not least, taking transparency and accountability before authorities, clients and stakeholders
more seriously!
The board of directors is the primary and one of the utmost key players in the development and
performance-measurement of corporate governance.
“Good boards are pretty uncomfortable places, and that is where they should be” -- Sir Christopher Hagg,
former Chair of the UK Financial Reporting Council.
Corporate Governance in Private Banking and Family Business:
Case of Success: Li Ka Shing;
When Li was of younger age, he worked hard to set up his businesses, building wealth for him and his
family (to transfer), so he had to use services from banks and wealth management providers.
Private bankers usually serve wealthy families, so (private) bank officials and customer relation agents
have to know well and get acquainted with the internal relations of the family members;
“Family wealth does not last more than two or three generations” -- Chinese proverb.
We can find it is challenging to maintain wealth that will pass through generations, while being kept well-administered.
This is why the role of private bankers is essential.
Family companies range from small businesses, medium firms, and even to large corporations. As a
matter of fact, family businesses comprise 25% of income per capita in the UK, and it has been a strong
basis of corporate wealth in Hong Kong.
One very important issue in the management of family business and wealth, is the transmission and
inheritance of leadership.
The rationale of family business is to cultivate the following:
· Wealth planning;
· Getting family together;
· Trust among family members.
Logically, the development of family business depends on the control exercised by the family (even
emotional motifs enter into the rationale of the family business development).
The advisory relation between family business and the banking relationship officer or agent, usually
evolves into the following stages:
1. In the first stage of family wealth advice, the agent acts as the investor itself;
2. Later, the agent acts as executor or trustee (as in the case of discretionary trusts, etc.);
3. The agent, then acts in the best interest of the principal customer(s);
4. Eventually, the agent has to manage by its own the (financial) relationships between the family
members (for this effect, private bankers usually know very well the details on the personal life of
their customers);
5. At the peak of the evolution process, the family business is also useful for charity and philanthropy
(the latter promotes social sustainability);

4. In the views and concepts of the Securities and Futures Commission, family business is advantageous for
economy and business. Promoting the sustainability of family wealth and business has become nowadays,
a commitment and challenge of regulators and wealth management service providers.
III. The Wealth Management Market, Challenges and Prospects Today and Tomorrow
Current Context:
Within these post-crisis years, the main challenges that the WM market has faced are the following:
1. Higher cost-income ratio;
2. Changes of investors’ demands:
· (More preference of) capital-preservative products;
· Weakened trust (from the clients);
· More choices of funds (as in the case of alternative investments);
· More technologically-savvy;
· Diversification and protection.
3. Tighter (and more dynamic) regulations and compliance schemes in place;
4. Increased technology and back-office costs;
5. Rise in boutique WM firms, shadow banking and widespread consolidation;
6. Are there any tax havens anymore?
Legal and Regulatory Overview:
We can find the competitive edge of Hong Kong (as International Finance Center within Asia-Pacific) in the
following factors:
· Legal framework: rule of law, consistent and fair law enforcement, strong and independent judiciary,
property rights, confidentiality;
· Tax system: simple, low and predictable taxation, incremental pattern;
· Strong regulatory framework: either by voluntary or compulsory compliance;
· International exposure, in addition to regional or local.
As part of the relevant legal and regulatory framework, from an International perspective, we can find the
following laws and ordinances:
· Dodd-Frank Act (US): Wall Street Reform and Consumer Protection Act;
· Volcker Rule (US), from the DFA: Restrictions on (discretionary) investments;
· FATCA (US): this refers to taxation issues of US nationals who hold accounts overseas;
· AML & Counter-terrorism financing (FATF, Worldwide);
· Retail Distribution Review (UK).
Nowadays, Hong Kong law has imposed duties of Directors (rather or in contrast to, companies), by
subjecting them to civil and criminal liability (reforms on Corporate Law, Companies Ordinance, etc. as of
March 2014).
Overview on Relationship Management:
Should regulators and policy-makers set the same standards for super-rich (HNW, UHNW) and ordinary
people, as investors?
[Most likely, no];
If one does see as a mater of consumer protection, it depends pretty much on the point of view from which
you address the question;
Banks still dominate the Finance sector.
How do banks and clients relate?:
1. Determined by:

5. · Transaction needs;
· Investment/ fiduciary duties;
· Fee income generated.
2. By class:
· Retail;
· Corporate;
· Private.
If one, as client, wants to do a clean transaction, better to do a secure transaction in Hong Kong.
In legal matters related to relationships between banks and clients, the revision of documents plays a very
important role: construction and interpretation matters are of special relevance;
In case of dispute resolution (either litigious or other, such as arbitration) over an agreement, outcome will
depend pretty much on terms and their construction, in addition to the background, as well as undertakings
and covenants inherent to the nature of the agreement.
Since 2008, and given to most updated regulations across several jurisdictions, the client onboarding
process should follow four steps:
1. KYC (Know Your Customer): identify the client;
2. Compliance: ensure consistency with relevant regulations (voluntary or compulsory);
3. AML (Anti-Money Laundering) & CTF (Counter-Terrorism Financing): ensure laws are not breached;
4. Green vs. red zone, allocate the client (according to operational risk, high or low).
Additionally, one new aspect is the (di)stress testing: regularly monitor the financial and operational
stability of banks and portfolios.
IV. Anti-Corruption Framework and Business Integrity
Legal and Financial Concepts Related to Corruption in US and UK:
The US Foreign Corruption Practice Act (FCPA), establishes a basic prohibition:
Any promise, authorization, payment or offer (otherwise, any act equivalent or valuable) of money or
anything of value, corruptly, either directly or indirectly, to any foreign official for influencing that official to
act or refrain from acting or securing an action.
In this context, we can find the following key words:
· Money (or anything of value) (?);
· Corruptly (intention), to a;
· Foreign official (who are public officials), to;
· Compel or influence an action…
Sanctions to FCPA violators:
· To corporates: maximum fine of US$2M;
· To individuals: maximum fine of US$100K or 5 years imprisonment (the fines cannot be paid by the
employer, so this refers to individual responsibility, or single liability of the Director or employee);
· In civil terms: a baseline fine of up to US$16K and restrictions to become public official;
Responsibility can be joint and/or several.
From the UK Bribery Act (UKBA, 2010), we can find the following points:
· Enters into force in response to bribery scandal in Saudi Arabia;
· One of the most stringent anti-corruption laws, to International standards;
· Covers all of UK corporations, citizens, nationals, related persons, within or outside the UK;
· Prohibits the bribes of government officials or private individuals;
· There are no exceptions on promotional expenditures, facilitations, or bona-fide payments;
· It extends to the concepts of giving and receiving corruptly;
· Fines are unlimited, either for individuals or corporates (and criminal penalties of up to 10 years for
individuals).
Ignorance of the law is not an excuse or waive from its compliance.

6. Recommendations for complying with these anti-corruption frameworks:
· Establish and perfection procedures and enquiries;
· Pledge to commitments at senior level of management;
· Conduct legal and operational risk analysis and assessment;
· Conduct due diligence;
· Ensure transparent communication and continuous training;
· Ensure consistent review and monitoring.
Systemic Risk and Crisis Management:
There has to be a balance of interest between the shareholder’s primacy, and the performance of the
Director in the company.
Risk Management:
· Risk appetite (higher or lower);
· Stress test;
· Info technology (IT).
International vs. multinational model:
· International (INT) (Japan): Liabilities with reliance on home country (centralized);
· Multinational (MN) (Spain): Subsidiaries autonomously raise funds (decentralized), increasing trend.
More recent trends:
· Addressing systemic risk with MN model, facilitates diversification;
· Codification of “enlightened shareholder value”;
· Differentiation from banks and Finance institutions or houses (example: shadow banking);
· Increasing shift from INT model, to MN model;
· Make risk management more efficient, ensure sustainability.
The competitive edge of the MN model comes from the need of autonomy and of distributing risks,
considering economic perspectives in time and place, and the operative (credit) and legal-regulatory
(policies, compliance) dimensions of risk.
Now, what is the difference between banks and Finance institutions?
· Banks: limited scope, wide frameworks (limited risk);
· F. Institutions: wider scope, limited frameworks (higher risk).
Though their risk is lower, banks have more challenges and scrutiny than Finance institutions (same on
legal, regulatory, and social grounds) as they are considered key players, responsible of economic
development (due to need of sustainable growth). Banks only carry banking activities, but financing
houses can carry more diversified activities;
Furthermore, corporate banking (rather than retail or private) provides the largest volume of lending,
syndication and credit business, but they also manage better to carry KYC and AML policies, as well as
updating their compliance and risk monitoring frameworks [Dodd Frank Act].
V. Listing Rules of the Hong Kong Stock Exchange (HKEX)
Rather than a regulation in itself, or a legal framework, the Listing Rules (LR) work more like a contract
between the listing company and the HKEX.
Challenges and opportunity areas:
· Gaps in rules;
· Weak enforcement;
· Anomalies (two-class share)
[Re. SWIRE and Alibaba];

7. · Shareholder activism: when insurance companies, trusts and pension funds, banks, and other financial
institutions get together to tackle one or more companies (institutional shareholders).
The LR set requirements for the listing shares and other securities, instruments in the HKEX. They are
provided in several tables and publications;
The Securities and Futures Commission (SFC) is the regulator of listing companies, being responsible for
the trading of securities and instruments, as established under the SFO.
Basic listing requirements:
· Financial requirements and principles;
· Paging fees and following of procedures;
· Get sponsorship.
Parties involved:
· Sponsors: their role is essential, as they undertake the listing application;
· Advisors
[Both sponsors and advisors play important roles in the listing process];
· The authority (SFC);
· The company applying for listing.
Issues to fix and consider:
· The Hong Kong market is very unique, it is impossible to simply adopt its local rules in other jurisdictions;
· Present need to achieve balance between market quality and shareholders’ interests;
· Present need to adjust regulations in order to balance the needs of investors’ protection and market
development;
· Present need to achieve a balanced approach between stakeholders, through public consultations and
active, transparent and clear communication;
“We need to have rules not only for those who do not behave, but for those who behave too (play by the
rules)”. Then, there is also a present need to keep perfectioning standards and benchmarking principles;
· Dispute resolution issues: there are not class-actions in Hong Kong, in order to enforce principles or
regulations in favor or shareholders (such as in the US, UK and other commonwealth jurisdictions.
· Fees to pay: sponsorship, listing and contingencies;
· Present need to improve consumers’ and shareholders’ protection principles.
VI. Financial Risk and Crisis Management
Concepts:
The two basic concepts to bear in mind about risk management, are the following:
1. Risk: Probability + Consequence;
2. Management:
· Focus: Prevent + Mitigate;
· Steps: Identify, assess, prioritize, treat, control & monitor.
In Finance, we can find many types of risks: Credit, Operations, Market, Liquidity, Legal & Compliance,
Strategy, Sustainability…
1. Credit risk: comprehends issues such as payment default, higher collection costs, systemic
environment and effects, etc.;
2. Operational risk: comprehends issues such as internal activities & control, management of human &
operational resources, transparency, and solutions (frameworks like Basel I, II, III), etc.
3. Market risk: comprehends mainly the fluctuations in the price of goods, due to macro-economic
conditions (demand/ supply, expectation, regulation and policy, etc.);
4. Liquidity risk: comprehends issues such as the capacity to meet demands of funds, and keeping/
maintaining confidence of the public;

8. 5. Legal & Compliance risks: comprehends mainly the stringency of regulators, concerns on how
complex and smart have clients become, complexity of products, and volatility/ instability of the
environment;
6. (Business) Strategy risk: comprehends issues such as losses incurred or likely to be incurred,
strategy formulation and execution, management of people and resources, as well as management
of products and projects;
7. Sustainability risk: comprehends issues such as corporate responsibility, current vs. future needs,
and the general environment (social, economic, and even natural)…
[Afterwards, we may find other types of risks…]
Desirable resolutions for Risk Management:
· Non-executive Director to chair committee;
· Strategies approved by the board;
· Bank-wide vs. activities-wide;
· Policies and processes for risk-taking;
· Limits to risk appetite, tolerance, etc.;
· Measure, assets, report across risk types;
· Periodic testing & review of policies and procedures;
· Update or change products;
· Name a risk management ambassador initiative;
· Proper management of documents and communications;
· Stress-test, contingency plans, crisis management.
The Basel Principles on Operational Risk:
The Basel Principles work as a tool to improve capital adequacy of finance houses, setting standards on
stress-testing, and in handling market liquidity risk.
Objectives of Basel Principles:
· Improve the capacity to manage the unexpected;
· Improve risk management, corporate governance, transparency and disclosure.
Capital requirements under Basel:
· Min. 4.5% risk-weight assets, deducted;
· Conservation buffer: 7% common equity standard;
· Countercyclical buffer: 0-25% comprising common equity (necessary)
[For Systemically Important Financial Institution (SIFI), required additional 1-3.5% (CET1)];
· Leverage ratio above 3% (according to US Treasury as of 2013, should be 6% for SIFI’s);
· Liquidity coverage: high-quality liquid assets for 30-days stressed funding scenario.
Risks in Corporate Governance (CG) within Banking-Finance Industry:
Importance of good CG in the Finance industry:
· Banks look for depositors’ money;
· Systemic risk increases or aggravates if banks or finance houses enter into trouble.
CG requirements:
· Policies, procedures and controls for risk management (in the 8 types of risk);
· Board should supervise policies and controls;
· Ensure there is adequate and sufficient capital to assume risks;
· Bear costs, ensure diligence of members and directors of the board, burden on management
[Innovation and creativity are not really necessary, but they can be an advantage in managing risks].
Connected lending, limitations (Banking Ordinance, art. 83):
· Limited only to unsecured loans to connected parties;
· Prevention on Conflicts of Interest (COI);
· Being Director involves heavy responsibilities;

9. · Directors are supported by Internal Auditors, who provide them guidelines for reporting and adopting
policies for risk management and mitigation.
Ensuring healthy CG in the Finance sector may be costly and time-consuming, but it is definitely worth it
(banks are too big to fail)!
Intelligent Measures for ensuring good CG in banks and finance houses:
1. Board Independence:
· Have at least 3 Independent Directors, or 1/3 part of the board;
· Independence brings balance, outside experience, and objective judgment;
· Challenges (in HK): small social circles (guanxi), ensure Directors have right skills and
qualifications; are Directors really independent?
2. Specialized Committees:
· Nomination, audit, risk management, remuneration;
· Majority to be held by non-executive Independent Directors;
· Bring skills and experiences;
· Dedicate enough time to assess risks;
· Ensure competency in Directors!
3. Board Meetings:
· Monthly basis, or no less than quarterly;
· Prevent leadership vacuum;
· Time and effort administration;
· Challenges (in HK): small circle, many Independent Directors serving in many boards.
4. Qualifications & Integrity:
· Only fit and proper, according to academic and professional preparation;
· Appointments ratified by the HK Monetary Authority (HKMA).
5. Public Disclosure:
· Transactions with group companies;
· Transparency is vital!
· Regular publishing (officially and commercially);
· Increases confidence of the public.
In the case of overseas CG, the HK authority looks upon the local CEO and local senior management, also
requiring reports on board meetings held within Head-Office (dual-reporting system). Some institutions and
banks have local boards and chairmen.
Lessons on Risk and Crisis Management from Previous Crises:
The concept of crisis teaches how to deal with major events that threaten to harm (systemically);
The concept of risk (management) teaches how to identify and deal with factors and potential events that
may affect the integrity of an institution or market;
Main issues to consider: competence, reputation, regulation and public scrutiny of authorities, confidence
in markets…
Financial Crises in HK:
· 1965: Hang Seng crisis, takeover by HSBC;
· 1980-1990’s: Stock crash (Black Monday), impact on USD/HKD exchange rates;
· 1990-2000’s: BCCI bankruptcy;
· 2008(!): Global financial crisis, tighter regulatory frameworks in place, in synchrony with other
jurisdictions abroad;
Lesson learned from the last major crisis: prevent systemic risk, supervising appetite vs. capacity of
institutions, anticipatory risk-awareness.
Institutional risk management, issues and challenges to consider nowadays:
· Need to implement simpler methodologies (not complicated);
· Risks vs. incentives;
· Disclosure against assumptions;
· Risk-awareness is not always present in product-selling process;

10. · Institutional control risk has tended to become similar to public policy risk.
Chain-effects are to be considered too! Crises can be managed, but management requires good
anticipatory awareness, there is need of enhancement not only at institutional level, but also as culture of
awareness and care among investors and stakeholders, as well as among regulators and even law-makers,
International and Multinational authorities;
Still a question will keep lingering: Adopt interventionist approach? Or non-interventionist?
Developments. Crisis Management / Risk Management:
· HKMA/ SFC product selling: X
· Circulars by HKMA: X
· FDR, Arbitration: X
· Investor Education Counsel: X
As note for conclusion, we can notice a shift in the adoption of (crisis and risk management) measures in
order to ensure an overall healthy CG in the Finance sector, moving towards a more preventive
perspective (rather than remedial), as this can be seen in an increasing trend of implementing more risk
management tools, than crisis management (development) tools.
VII. Fiduciary Duties
The most relevant aspects to consider in this regard are the following:
1. Caution not to breach regulations for underwriting and the issuance of prospectuses;
2. Financial promotion: caution in ensuring compliance with civil and criminal laws;
3. In case of breach, the first time can be only a cautionary admonition, but reincidence can lead to civil
and criminal liability
[Average 2 years imprisonment, under certain conditions is also punishable with economic fine];
4. Civil remedies:
· (Not) illegality or voidance of contract;
· Economic compensation (for loss), not recoverable;
· Enforcement of contract, just and equitable remedies;
· Sanctions may be extensive to network of advisors.
VIII. Case Study for Financial Dispute Resolution (FDR): Selina Kwok vs. HSBC
Context of the Case:
Elements in closing the deal:
· Account opening instructive;
· Disclosure statement;
· Lunch: meeting to open account (discretionary);
· Documents were signed at meeting;
· Standard memo of charge;
· Client is private banking customer.
Core issues for dispute:
· Exclusion of liability;
· Breach of duties?.
Matter of Dispute Resolution Process:
Duties to consider for this case of dispute:
· Undisputed duties: care and skill, diligence in following instructions;
· Extra duties: accurate information (?), provide further advice (?).

11. The court held that extra duties were not owed by HSBC to Selina Kwok, then:
· Undisputed duties were not breached;
· Alleged extra duties were not owed.
Result: no breach of agreement by side of HSBC.
Furthermore, the Control of Exemption Clauses Ordinance was not to apply to this case. Aspects to
consider in this regard:
· It is obligation of the bank to act with care (reasonably), but it is not possible to contract out of obligations
when supplying services to a client.
· Unconscionable part? Court may disregard [apply severability within the agreement], however, according
to the court that knew about the case, there were no unconscionable terms.
· Exclusion of liability does not apply for (in)accuracy of information, nor for losses or investments,
provided that the bank acts with reasonable care and diligence.
Usually, banks recommend their clients to seek independent advice of their own, the bank is not obliged to
provide extra materials that contain technical details (related to investments and portfolio management), in
the understanding that such information is considered confidential and is not required to be provided, on a
compulsory basis.
Outcome and Conclusion on the Kwok-HSBC Case:
In its resolution, the court considered the following:
· HSBC complied with its core duties, whereas there was no obligation to provide extra duties;
· HSBC properly advised Ms. Kwok;
· HSBC managed the (discretionary) account with care and skill;
· HSBC provided fair and accurate information;
· HSBC properly informed Ms. Kwok on feasible risks;
· HSBC properly conducted KYC checks and processes;
· HSBC did not sell financial products unsuitable to Ms. Kwok’s profile and investment appetite (in its
capacity as client).
Then, do duties arise by implication of law?
Morale of the case: Certain clients (like Ms. Kwok), or better said, many clients lose cases in courts
against banks, because they “did not read the contract”, are not entirely familiar with their terms, or even
worse, did not follow recommendation by the bank of seeking their own independent (professional) advice;
Then, does not make sense to pass the burden on the bank in saying that “the client was not advised (or
was not persuaded/ dissuaded) of using a banking service”.
Application of the Unconscionable Clauses Ordinance (UCO), is also dependent on the bargaining position
of the client, maybe the client did not have a strong bargaining position…
IX. Theory of Financial Dispute Resolution (FDR)
Disputes in the Financial Sector may arise due to reasons related to product complexity, selling process,
ethical conduct of staff, customer behavior and choices of any parties in the operation;
Disputes may involve monetary or regulatory compliance claims (especially at higher levels).
In the current context of the Finance sector, we can find 3 principal tools for FDR:
· Negotiation;
· Litigation;
· Alternate DR means, such as mediation and arbitration.
For purposes of our study, we will focus on mediation and arbitration (as both being ADR tools).
Mediation:

12. Mediation can be considered a sort of assisted negotiation. Its competitive edge lies in its flexibility, given
the following features:
· It is less formal than other procedures, such as arbitration or litigation;
· Intends the intervention of a third party (mediator), and may not involve (ideally) the intervention of a legal
counsel, by reason of economy;
· Sessions can be conducted in a joint or separate manner;
· Confidentiality can be assured and costs are shared among parties;
It is better to conduct mediation without the assistance of legal counsel, in order to make it a less costly
process, though ultimately it is a decision up to the client. Additionally, not only it serves to ensure
reduction of costs, but avoiding the intervention of advocates also helps to make the process less
aggressive, and less formal (or solemn);
In case the intervention of legal counsel is recommended or needed, it is preferable to conduct joint
sessions, rather than separate, in order to ensure economy in procedure.
Costs in the mediation process are usually borne by the parties on a basis of equality, unless parties
expressly agree otherwise.
Another conceptual advantage of mediation, is that it makes significantly unlikely that any issues should be
taken to a courtroom, unless there are any direct threats to know of, or any more significant (either
materialized or imminent) damages or losses.
From the Civil Justice Reform (CJR) of 2009, and the Practice Direction (PD-31) of 2010, both negotiation
and mediation processes are seen principally as part of best efforts available to solve disputes on or
before they reach the courtroom, and both DR means contribute to minimize risks (as well as imminent
prejudices).
In matter of FDR, at least, there are 2 main types of mediation:
· Facilitative;
· Adversarial.
The Mediation Ordinance defines the 2 most important aspects of mediation itself, as A/FDR process:
· Its meaning and competitive edge, from a legal perspective (in the terms as previously reviewed);
· The need and duty of ensuring confidentiality of communications.
Confidentiality is indeed a very important part of mediation, and of the mediator’s code of conduct
Why confidentiality?
· Reputation and brand name issues;
· Avoid predictability and (open) publicity related to the position of adversaries (including that of the
concerning finance house).
According to PD-31, the mediation process should follow at least some relevant steps:
1. Preparation:
· Certificate subscription: defining whether parties will enter mediation;
· Notice of mediation process by the initiating party;
· Response by the receiving party;
· Choosing mediator: to be appointed between both parties.
2. Bargaining process;
3. Settlement;
4. Conclusion.
Under PD-31, the mediation process is to be undertaken within the Court of First Instance, applying the
rules of civil procedure, as commenced by writ.
Arbitration:
Different to mediation, arbitration rather works as document only. Its main features include:
· Similar to closed court;
· Contrary to in mediation (in most cases), the arbitrator has deeper knowledge of the dispute matter (the
subject of controversy);

13. · While confidential as well, arbitration in most cases involves a legal course;
· At the end of the legal course, arbitrator issues an award;
· The award issued by the arbitrator (as final resolution issued in court) is conclusive and binding on the
parties, non-appealable.
Arbitration is guided on International grounds under the New York Convention, which sets guidelines,
processes and principles, and generally a code of conduct for the arbitrator.
Arbitration usually requires involvement of legal counsel, as it is a more formal process, it attends more in-depth
into the matter or subject of controversy, in addition that the parties and the arbitrator need to be
prepared; furthermore, in arbitration we can find a strong element of enforcement (non-appealable
resolution).
In matter of FDR, we can find 2 types of arbitration:
· Institutional (conducted by bodies established on a permanent basis);
· Ad-hoc (conducted on an improvised basis).
The Arbitration Ordinance consolidates HK jurisdiction’s position as a leading jurisdiction for International
A/FDR, well-known for time and cost effectiveness, flexibility, and effective enforcement;
From an academic point of view, it is very hard to find a unified arbitration procedure on International or
multi-jurisdictional grounds; however, arbitration is not common in Commercial and Finance sectors, as it
is more costly than mediation.
An additional point of discussion we can find in arbitration, is: How many arbitrators should there be in an
arbitration process?
In this regard, conventional (professional) experience, suggests trying to avoid even numbers, so usually
arbitration panels are conformed by 3 arbitrators: one for each party in conflict, and a third one to be
neutral.
Among F/ADR means, we can find that mediation is the most efficient in time and cost, and most likely
arbitration follows afterwards;
In the HK jurisdiction, the Financial Dispute Resolution Center (FDRC), is organization [though not a
regulator] locally qualified to undertake arbitration process, though only for smaller monetary claims (for
value up to HK$500,000) and/ or regulatory misconducts or complaints; in the understanding however, that
in processes undertaken by the FDRC, costs are commonly shifted from the parties, and borne by the
regulator.
[Case for revision: Apple vs. Samsung]
X. Anti-Corruption and Bribery in the HK Financial Sector
Corruption by (or through) Agents:
As reviewed previously, and considering the framework applicable within HK jurisdiction, the concept of
corruption (in the context of the Banking Industry and Finance sector), considers the following:
· Any agent, without lawful authority or reasonable excuses, solicits or accepts advantage for his act of
forbearance, commits an offence; or
· Any person offers advantage to an agent for compel action (or inaction);
· In this context, gent refers to any public employee, civil servant, or even a private employee or agent
(whether exercising any public function or not).
The Prevention of Bribery Ordinance, defines public servant as a prescribed officer or employee of a public
body (other than honorary);
Public body refers to any government agency, secretariat, council, board, committee, association, and
even academic institutions, such as the University of Hong Kong (HKU).
About the HK Independent Commission Against Corruption (ICAC):

14. In the case of Hong Kong, the ICAC can apply to a court for an requiring any person to make a statutory
declaration or written statement to assist in an investigation process;
The ICAC may apply for a restraining order (usually directed to suspects);
Also, the ICAC promotes preventive education in matter of anti-corruption and bribery, promote culture of
social and business integrity.
The anti-corruption programs of the ICAC work as target-based, directed towards:
· Public sector;
· Business sector;
· The HK ethics development center;
· NGO’s and the (social) third sector.
Anti-corruption programs of the ICAC include the issuance and provision of:
· Codes of conduct;
· Advice and consulting;
· Ethics and integrity training;
· Practical guidelines;
· Promotion education
[In relation with this last program, ICAC provides qualification, accreditation and licensing frameworks, as
well as CPD courses, among other academic and professional activities for financers, accountants, jurists
and lawyers, etc.]
Conflicts of Interest:
One key issue in preventing corruption and bribery in the Financial Services sector is to avoid conflict of
interest (COI), which arises when the [self] interest, that of relatives or friends of a Director [or employee]
of a company interferes with those interests of its company, those of the public or those of the Director’s
[or employee’s] duty to carry out;
Of course, in business logic, the Director or employee must put the company’s or agency’s interests before
its own;
In this understanding, Directors and employees of a company (generally) are recommended and even
compelled to declare at any or all relevant and opportune time, when a potential or imminent COI is to
arise during a discussion, negotiation, or generally at any time during the process of closing of a deal.
When a COI arises, the Director or employee shall:
· Stay alert on any potential or imminent COI arising in any negotiation or deal in closing process;
· Avoid and declare/ disclose its COI;
· Refrain taking part in discussions, or to enter into (some or all parts of) a negotiation process.
The most problematic edge of a COI is that the conflict may eventually lead to abuse and mistrust.
Furthermore, an employee or agent from a financing institution shall never feel obliged to deny an
application, when COI is to arise, in any case, the employee should better turn it or pass it to a colleague
or superior.