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Hong Kong opens fresh public consultations on financial failures

[HONG KONG] The Hong Kong government opened a second round of public consultations on the introduction of sweeping new powers that aim to protect taxpayers from big financial firm collapses, marking an important step towards ending "too big to fail".

The proposals, outlined in a consultation paper published on Wednesday, reflect Hong Kong's commitment to implement a reform agenda set by G20 nations in the wake of the 2007/08 global financial crisis.

Hong Kong's insolvency laws could be changed dramatically, and its financial regulators would be given increased powers if the proposals are adopted.

Responses to the consultation paper must be submitted by April 20, while the government has said it expects to table legislation by the fourth quarter this year.

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"This second consultation paper is an important step to bringing Hong Kong in line with global recommendations for ending the 'too big to fail' problem," said Royce Miller, head of Asia financial services at law firm Freshfields Bruckhaus Deringer in Hong Kong.

"The legislative reforms that the Hong Kong authorities propose in this consultation should make it significantly less likely that a government bail-out would ever be needed in the future," he added.

After Lehman Brothers collapsed in 2008, governments in the United States and Europe went on to spend more than US$1.7 trillion bailing-out failing financial firms, fearing that their collapse would trigger a global meltdown.

A year later, countries across the world pledged to introduce new laws that would empower governments to let such firms go bust while maintaining critical functions such as ATM payments.

These so-called "resolution" powers would allow governments to take a range of drastic measures from replacing the firm's management and hiving-off assets, to bailing-in local bondholders.

Reuters reported last month that several Asian nations, including mainland China, India and South Korea were making slow progress implementing these reforms.

Hong Kong issued its first consultation paper a year ago.

The former British colony was returned to China in 1997 under a "one country, two systems" formula, which guarantees the financial hub wide-ranging autonomy from the Communist Party-ruled mainland.

Due to the complexity and scale of the proposals, the government has opened a second consultation to explore key issues, including governance, the treatment of creditors, and the scope of the government's "resolution" powers, in more detail.

Legislating resolution powers is critical if Hong Kong is to maintain its status as a global financial centre.

Hong Kong hosts 38 of the world's largest and most systemically important financial firms.

Home regulators of global banks like HSBC or Standard Chartered will be reluctant to let them operate in countries that have not implemented resolution laws, according to laywers.