In July 2025, the Hong Kong Monetary Authority (HKMA) announced Phase 2 of the Mandatory Reference Checking (MRC) Scheme, which was implemented on 30 September 2025. Alan Au, Executive Director (Banking Conduct), HKMA, explains the policy thinking, overseas touchpoints, lessons from Phase 1 and how governance professionals can strengthen culture and conduct across financial institutions.

What motivated the HKMA to develop the MRC Scheme in the first place?

‘The origins of the scheme trace back to the 2008 Global Financial Crisis. In the wake of that crisis, international reforms initially focused on strengthening the resilience of financial institutions, with measures targeting capital, liquidity, resolution regimes and market transparency. However, it soon became clear that an equally critical area, that of conduct and culture, was being overlooked.

In 2017, the HKMA launched its Bank Culture Reform to address this gap. The initiative was built on three interconnected pillars. The first pillar, governance, emphasises the importance of setting the right tone from the top, with strong board-level oversight to drive ethical behaviour. The second focuses on incentive systems, covering how institutions recruit, train, promote and reward staff, ensuring that the right behaviours are recognised and reinforced. The third pillar, assessment and feedback mechanisms, involves establishing effective monitoring tools such as dashboards and whistleblowing mechanisms, allowing senior management to hear and act on what I call the “echo from the bottom”.

Despite these reforms, we cannot simply assume that bank staff will always act with integrity. From time to time, there are still some “bad apples” who engage in misconduct. When such actions are discovered, these bank staff, who damage the interests of customers for their own benefit, will often try to move on to another banking institution to evade the consequences and to repeat their misconduct, meaning that the risk of misconduct simply spreads – or “rolls” – from one firm to another. The MRC Scheme was developed specifically to close this gap by introducing a system-wide approach to identifying and addressing these risks.’

Why weren’t traditional reference checks enough to catch misconduct risks?

‘In the past, hiring traditionally relied on two tools – self-declarations by applicants and references from former employers. Both had limits. Individuals could simply choose not to disclose past investigations or internal disciplinary actions. Former employers generally restricted references to bare facts, such as dates and titles, but often felt unable to provide conduct-related information, such as details of any previous investigation or disciplinary action taken, due to potential litigation risks, or simply because records had just not been maintained in a way that supported meaningful disclosure.’

How has the MRC Scheme closed that gap?

‘The scheme has introduced an industry-wide, mandatory protocol to ensure transparency and accountability in hiring. Candidates must first consent to reference checks, after which their previous employers are required to provide fact-based conduct information covering the past seven years using a standard template. The conduct information to be reported includes past disciplinary actions, incidents that cast doubt on an individual’s honesty or integrity and any relevant ongoing investigations. To ensure fairness, any negative information triggers an opportunity to be heard. The candidate can explain or respond to the negative information before the hiring decision.’

What have you observed since Phase 1 went live?

‘Phase 1 of the scheme was launched in May 2023, covering approximately 3,500 senior banking staff. These included senior executives such as the chief executive, alternate chief executives, directors and managers as defined under the Banking Ordinance, as well as executive officers and officers responsible for securities, insurance and Mandatory Provident Fund (MPF) business within banks.

Since the launch of the Phase 1, approximately 700 reference checks have been conducted under the scheme, with nine cases – about 1% – containing negative information. While the percentage is small, it is certainly meaningful, demonstrating that the scheme is able to uncover risks that would otherwise go undetected.

Looking ahead, this percentage may decline – not because the scheme is ineffective, but because individuals with a history of misconduct will recognise that they cannot bypass the scheme and will be deterred from seeking a position within the sector. This is precisely the scheme’s objective, to prevent bad apples from rolling through the banking industry and causing further harm.’

What has changed in Phase 2?

‘The scope of checks has been greatly expanded. Phase 2 will extend coverage to about 50,000 staff – more than half the banking workforce – including those licensed or registered to carry out securities, insurance or MPF regulated activities within banks. The same parameters apply, namely candidate consent, conduct-related reference information covering the past seven years using a standard template, and the opportunity to be heard. We have strong industry support for the expansion.’

Do you think the market’s response to the MRC Scheme reflects a growing awareness of the importance of culture and conduct?

‘Absolutely. There is definitely a much greater awareness now. Over the past few years, we have introduced a series of measures to strengthen culture and conduct across the banking sector. It is not something that can be addressed by a single initiative, which is why I emphasised earlier the broader framework we have built around the three pillars of sound bank culture – governance, incentive systems, and assessment and feedback mechanisms.

The MRC Scheme is just one part of the equation, expressly designed to tackle the issue of rolling bad apples. The scheme cannot transform culture on its own, but combined with other measures, it plays an important role in safeguarding the system and raising standards across the sector.

Our overarching goal is to achieve two key outcomes. The first is to ensure that firms and their staff treat customers fairly. This means selling suitable products, offering services that meet customers’ needs and promoting financial inclusion. The second goal is to deliver good customer outcomes. When customers purchase a product today, they won’t necessarily know whether it will still meet their needs three or five years down the line. It is therefore vital that frontline staff focus on identifying products that align with customers’ long-term financial objectives and personal circumstances, rather than simply pushing a particular product to earn a higher commission or a bonus.’

Where can governance professionals add the most value?

‘The first is the tone from the top. Senior leadership must clearly articulate the values and objectives they want to see embedded in the organisation. Banks, especially large retail banks in Hong Kong, are highly structured organisations with thousands of employees spread across multiple layers, from the board and top management to middle management, branch management and finally the frontline staff. The challenge lies in ensuring that the messages from the top are not confined to the boardroom, but instead filter through every level of the organisation.

The second element is the echo from the bottom. Leaders need to understand what is truly happening on the ground. You have to ensure that the messages, when they are filtered through, get internalised by your staff. They have to believe in the importance of treating customers fairly and of achieving good customer outcomes.

Of course, there are also practical tools that support this process. The MRC Scheme is one such tool. Plus, we are in discussions with other financial regulators about extending similar mechanisms beyond banking and into non-bank financial sectors, because misconduct does not stop at sector boundaries.’