Enhanced Monitoring of Compliance with the Code of Banking Practice

As a result of a recent review, last week HKMA announced that it will be introducing the following new measures for enhanced monitoring:

1. Annual self-assessments with revised reporting template

• The current biennial self-assessment exercise will revert to a yearly basis. As a transitional arrangement, the forthcoming exercise will cover a reporting period from 1 June 2008 to 31 December 2009. This will enable HKMA to assess banks' full compliance with the current version of the Code which took effect on 2 January 2009.
• In addition, the reporting template for the self-assessment has been revised so that banks set out their rationale for any deviation from the norm in certain areas. For instance, section 12.3 requires banks not to charge customers "extortionate interest rates". A bank might be charging over 48% (the level presumed under the Money Lenders Ordinance to be extortionate) in some cases but decide that it is in compliance with that section because it sees itself as having strong justification for doing so. Instead of reporting a simple "yes" as in the existing template, the revised template would require the bank to provide further information on its justification for cases where it charges in excess of 48%.
• As in the past, all banks are required to commission their internal audit department, compliance department or other equivalent unit to conduct the self-assessment. The chief executive of the bank should co-sign the self-assessment report. Where an instance of non-compliance is identified, the bank concerned should provide details of the case including its plan to rectify the situation. A full account should be given if the instance of non-compliance is a recurrence of similar instances identified in previous exercises.

2. Exception reporting

• Based on results from previous self-assessment exercises, most of the non-compliance cases concern subjects covered in Chapter 1 (Relationship between Banks and Customers) and Chapter 2 (Accounts and Loans) of the Code. These also tend to be areas that attract customer complaints and therefore call for priority attention. Henceforth, banks should notify HKMA as soon as practicable of any breach of any provision within Chapters 1 and 2 of the Code, adopting the standard format below. Such exception reporting will facilitate HKMA's timely monitoring of rectification action, and should also help focus banks' attention on measures needed to strengthen their compliance with the Code.

3. Mystery shopping

• Both self-assessment and exception reporting inevitably reflect banks' own perspectives of their compliance with the Code. Drawing on the monitoring frameworks in other jurisdictions, including the UK and Australia, HKMA is proposing to introduce a trial mystery shopping scheme as a proactive approach to seek to assess compliance from the consumer's perspective. By testing customer experience against expectations set by the Code, this research technique may reveal useful information regarding levels of compliance with the Code and identify potential areas for improvement.
• Starting from 2010, HKMA will engage the services of one or more organisations engaged in market research activities to undertake mystery shopping exercises. In determining the scope and frequency of such exercises, HKMA will be guided by any concerns or trends emerging from the self-assessment results or other sources regarding banks' compliance with the Code. A key area, by way of example, which lends itself to the mystery shopping technique is the use of mystery shoppers to assess the extent to which bank staff are able to provide clear and accurate information in accordance with requirements under the Code.
• HKMA does not intend to take the findings of a particular mystery shopping exercise to be fully representative of a bank's general level of compliance with the Code. Nevertheless, where mystery shopping indicates possible compliance problems within a bank, it will prompt HKMA to consider follow-up work to establish why any failings occurred. The findings will also provide HKMA with insights to share with the AI concerned. In addition, examples of good and bad practice identified by any mystery shopping campaign can be shared with banks generally with a view to improving industry practice.

I particularly support extending mystery shopping to banking practices. Bank staff should understand that misleading customers is unacceptable in both banking and investment services.