LegCo Paper No. CB(1) 387/96-97
(These notes have been seen by
Ref : CB1/BC/44/95
Bills Committee on Banking (Amendment) Bill 1996
Minutes of meeting held on Tuesday, 15 October 1996 at 8:30 am in Conference Room B of the Legislative Council Building
Members present :
Dr Hon HUANG Chen-ya, MBE (Chairman)Members attending :
Dr Hon David K P LI, OBE, LLD (Cantab), JP
Hon Ronald ARCULLI, OBE, JP
Hon Paul CHENG Ming-fun
Hon Ambrose LAU Hon-chuen, JP
Dr Hon LAW Cheung-kwok
Hon SIN Chung-kai
Hon Mrs Elizabeth WONG, CBE, ISO, JP
Hon NGAN Kam-chuenPublic officers attending :
Attendance by invitation :
- Mr Albert K C LAM
- Principal Assistant Secretary for Financial Services (Banking & Monetary)
- Mr Geoffrey FOX
- Senior Assistant Law Draftsman, Legal Department
Clerk in attendance :
- Mr David CARSE
- Deputy Chief Executive (Banking), Hong Kong Monetary Authority
- Mr Raymond LI
- Executive Director (Banking Policy), Hong Kong Monetary Authority
- Mrs CHAN WONG Shui
- Chief Executive, Consumer Council
- Ms Agnes YUNG
- Chief Legal Affairs Officer, Consumer Council
- Mr Ivan YIM
- Country Manager, Hong Kong/Macau, Visa International
- Mr Dan CHAN
- Chip Card Development Manager, Hong Kong/Macau, Visa International
- Mr Rodolphe CHABANEL
- Associate Director, Stored Value Card Marketing/Implementation,
Asia-Pacific Region, Visa International
- Mr Denis CHEUNG Shiu-shing
- Chairman, Hong Kong Foreign Exchange and Deposit Brokers Association
- Mr Benny LUK King-sang
- Secretary, Hong Kong Foreign Exchange and Deposit Brokers Association
Staff in attendance:
- Mrs Constance LI
- Chief Assistant Secretary (Finance Committee)
- Ms Kitty CHENG
- Assistant Legal Adviser 2
- Mr Andy LAU
- Senior Assistant Secretary (Finance Committee)
Meeting with the deputations and the Administration Consumer Council
1. The Chairman welcomed Mrs CHAN WONG Shui, Ms Agnes YUNG and representatives of the administration and Hong Kong Monetary Authority (HKMA) to the meeting.
2. At the invitation of the Chairman, Mrs CHAN presented the views of the Consumer Council in relation to the proposed legal framework on the regulation of multi-purpose stored value cards (MPCs), as detailed in LegCo Paper CB(1)2140/95-96(01). While the Consumer Council welcomed the introduction of new products to enhance consumer convenience, they considered that there was a need to regulate the issue of MPCs to offer consumer protection and to allow fair competition.
Security of funds
3. The Consumer Council noted the safeguards provided under the proposed legislation relating to the security of funds paid by consumers to purchase the MPCs. Nevertheless, the Consumer Council considered that better provision should be afforded to such funds which did not generate any interest to card-holders. They suggested that perhaps the issuing institutions should be required to place the deposits in a separate trust account to avoid being affected by the risks of other business activities of the institutions.
4. The Consumer Council was also concerned about what protection would be offered to users of the new payment system, in particular the availability of records for verification or recovery of unused value, the security procedures against forgery, and limits on the institution's liability. They considered that the issuing institutions should comply with the provisions in the Personal Data (Privacy) Ordinance and should not disclose customers information without authorization. They also suggested that the institution should issue clear information regarding the acceptability of its card, and put in place an appeal mechanism to deal with grievance and complaints concerning unreasonable conditions set by retailers for acceptance of the cards for payment. The Consumer Council suggested these measures be included in the Code of Banking Practice or the licensing/authorization conditions as appropriate.
5. While agreeing that due care should be exercised when dealing with the new payment system to ensure that customers' funds were secure, the Consumer Council was equally concerned that there would not be any stiff barrier against entry to the market. They therefore suggested that HKMA should include in the approval or exemption conditions competition clauses similar to those already in place for broadcasting licences and telecommunication licences. The objective was to prohibit anti-competition practices by issuing institutions.
6. In response, Mr David CARSE advised that HKMA's responses to the points raised by the Consumer Council had been set out in LegCo Paper CB (1)108/96-97(01). He said HKMA agreed to most of the views of the Consumer Council, and that by safeguarding customers' interest and the security of funds, it would also help protecting the new payment system as a whole. However, the Banking Ordinance was primarily aimed at protection of the stability of the banking system and depositors, and competition issues were outside the ambit of this Ordinance. He also had reservations that funds paid for the purchase of MPCs should be given better protection than demand deposits as the latter also did not generate any interest to the customers. Regarding the suggestion of setting up a separate trust account, he considered that this might not be necessary since the proposed regulation would already enable HKMA to lay down conditions for float' management, and that non-bank issuers would be required to set up special purpose vehicles to ensure the provision of an identifiable balance sheet to which the capital adequacy ratio and other prudential supervision requirements would apply.
7. Regarding the security requirements of the MPCs, Mr CARSE advised that there would be an elaborated system to guard against forgery. HKMA would require card issuers to demonstrate that their cards were subject to adequate chip security arrangements, and risk management procedures. Some stored value cards such as the Mondex cards (which were linked to the customers' accounts) would enable the card-holders to recover the unused value if a lost card was returned to the bank. The use of PIN could also prevent unauthorized use of the card.
8. On the question whether those funds paid for the purchase of electronic value would invariably fall within the definition of deposits' so that these would also be subject to the preferential payment provision under section 265 of the Companies Ordinance, Mr CARSE advised that this would require further deliberations. The legal issues could either be left to be sorted out when an actual case occurred, or by way of primary or secondary legislation. The Administration had yet to come up with a view on this issue.
9. Members were generally in support of the Consumer Council's views about prohibiting anti-competition practices. Responding to Mr David LI's question that whether the anti-competition issues could be dealt with in the Code of Banking Practice, Mr CARSE advised that while HKMA recognized the merits of the Consumer Council's point of view on competition, he had reservations about making formal regulation on those commercial issues which were outside the ambit of the Banking Ordinance. It was also undesirable to overload the Code of Banking Practices with contentious issues which had no direct bearing on normal bank-customer relationship. This would also risk delaying the completion of the Code.
|10. On Mr David LI's suggestion that anti-monopoly rules should be introduced to ensure fair competition in the banking field, Mr Albert LAM advised that as the Consumer Council was compiling its report on the general competition environment in Hong Kong, the Administration would, in the light of the report findings, conduct an overall review on the subject to see if legislative or administrative measures were necessary for promoting a healthy competition environment. In response, Mrs CHAN of the Consumer Council remarked that as the overall review would take time, and given the fast changing market, it would be advisable for the Administration to take early action to prohibit anti-competition practices in individual industries. Agreeing with Mrs CHAN, the Chairman asked the Administration to review the matter for further discussion.||Admin|
11. Mr Ronald ARCULLI commented that the Consumer Council's views seemed to place more emphasis on card security and consumer protection than on fair competition. Noting that authorized institutions would likely be the primary providers of MPC services, Mr ARCULLI was of the view that non-bank entities should not be debarred from issuing stored value cards of limited value. Should regulation be necessary in this respect, he suggested that it could simply take the form of introducing a statutory ceiling (say, $1,000) on the value that could be stored on the card. In response, Mr CARSE advised that the legislation could allow for this kind of approach, and exemption would be considered for non-bank issuers subject to certain conditions, for example, a restriction on the amount. He added that neither the banks nor non-bank issuers should have preferential treatment regarding chip security and risk arrangement etc. He assured members that the proposed framework would provide flexibility to cater for future development of the market, and the Administration would avoid excessive regulation which might stifle product innovation and competition. As regards whether a multi-system should be put in place to enable retailer shops to accept different types of cards for payment, Mr CARSE advised that its feasibility would depend on the actual development of the market. At the present stage, there might be technical difficulties as the potential card issuers adopted different technology in their card design.
12. Responding to Mr ARCULLI's comments, Mrs CHAN of the Consumer Council clarified that the Consumer Council would like to have a balance between competition and consumer protection such as security of funds. In this respect, the Consumer Council considered that HKMA should assume the role of monitoring through regulation and the authorization and exemption conditions.
Banking via Internet
13. Mrs Elizabeth WONG asked whether the proposed legislation had catered for banking via Internet. In reply, Mr CARSE advised that digital cash on the Internet was not widely in use at the moment and it was unlikely to be a mass product for the time being. As such, this would not be covered in the legislation, but the Administration would keep in view of the development in this area.
14. On the wider issue of carrying out banking activities on Internet, Mr CARSE pointed out that there were a number of security risks such as disclosure of transaction details over the Internet. The HKMA was examining whether advertisement of off-shore banking on the Internet was in contravention of section 92 of the Banking Ordinance.
Security of MPC schemes
15. In reply to the Chairman, Mr CARSE advised that in the case of the VisaCash scheme, if an issuing bank went into liquidation, the value which could be re-deemed by a card-holder would depend on the assets and liabilities of the issuing bank. The arrangement would be similar to that for other depositors, subject to any loss-sharing agreement between the issuing banks in the Visa Scheme. The liquidation of one issuing bank should not affect the other member banks unless it caused a more general loss of confidence in cards issued by such banks.
16. The Chairman asked whether there were any implications on the local Mondex scheme if an overseas Mondex card issuer encountered serious financial problems. Mr CARSE advised that all Mondex value in Hong Kong dollar could only be created by an originator in Hong Kong with backing in the form of safe and liquid assets which were subject to the monitoring of HKMA. Details regarding the distribution or transfer of such value to overseas customers were still under examination. However, the Mondex value created by the local originator would remain good as such value was backed by Hong Kong dollar assets under HKMA supervision. Noting that the Mondex scheme might eventually develop into a global scheme permitting cross-border and multi-currency uses, members expressed concern about what safeguards would be introduced to minimize risks in this area. In particular, members were concerned about the measures to ensure the financial soundness of an overseas issuer/originator, and the detection and warning system against acceptance of problem Mondex cards.
17. In response, Mr CARSE advised that holders of MPCs were subject to the same risks as holders of liabilities issued by foreign banks. Unlike legal tender, a Mondex card might not be accepted by retailer shops if the value was in doubt. He noted members' concern and would further discuss with the Mondex originator in this respect.
|18. On the Chairman's further question that whether Mondex value could be created without the knowledge of HKMA, Mr CARSE advised that no Mondex value could be created except by the Mondex originator, and there were clearly defined procedures governing the manufacture of Mondex value which would take place only upon the instruction of the originator and at the Global Key Centre in the United Kingdom. Furthermore, by requiring the originator to register as a special purpose vehicle, HKMA would be able to monitor its operation such as imposing the backing requirements and the internal control and accounting systems. At the request of the Chairman, Mr CARSE would provide further information to members.||HKMA|
19. The Chairman thanked Mrs CHAN and Ms YUNG for their valuable comments on the subject.
20. Mr David LI declared an interest as the Deputy Chairman and Chief Executive of the Bank of East Asia, Ltd. and withdrew from the discussion.
21. The Chairman welcomed Mr Ivan YIM, Mr Dan CHAN and Mr Rodolphe CHABANEL to the meeting.
22. With the aid of presentational materials (LegCo Paper CB (1)115/96-97(07), Mr Dan CHAN briefed members on the operation of the VisaCash scheme, highlighting its development, system features and the clearance and settlement procedures. To provide convenience to customers, VisaCash cards were mainly targeted at the low-value transactions to supplement other payment methods. The proposed system would enable VisaCash transactions to be authorized off-line, while providing a high level of card and transaction security. Payments using the VisaCash system would be cleared between participating banks through the Visa Clearing and Administration System (VCAS). Archives files would be maintained for audit purposes.
Three Product Options
23. Mr Ivan YIM advised that the VisaCash scheme would offer three product options: the stand-alone disposable card, stand-alone re-loadable card and feature re-loadable card (i.e. credit card/ATM card cum VisaCash). Presently, only the stand-alone disposable card was made available to the market, while the other types were currently being tested in the United States and Australia aiming at introduction to the Hong Kong market in early 1997. Under the soft launches of the scheme in Hong Kong, about 1,000 active merchant terminals had been registered so far.
VisaCash transaction processing
24. In response to members' questions on the actual transaction process, Mr CHAN advised that when a visa cash purchase was initiated, the authenticity of the card would be validated by the merchant terminal and the balance of the value on the card would be displayed. The merchant terminal would then deduct the purchase amount and display the remaining balance of the value of the card. If the value of the card was insufficient to settle the purchase amount, the difference could be met by cash or other payment methods. The transactions stored at the merchant terminals would be downloaded to a Concentration Point periodically for transmission to the VCAS. Each day, the VCAS received and validated batches of such transactions and created settlement transactions to collect funds from the card issuers for disbursement to the merchant acquirers. There were built-in auditing procedures to verify the transaction details, and in case of a mis-match of information, the card in question would be suspended from use pending further verification by the system.
25. Regarding the denomination value of a disposable card, Mr YIM advised that for security reasons, the present limit was set at 500 units of the currency in use, for example, HK$500 for cards in Hong Kong and US$500 for the United States. In reply to members, Mr YIM said that the denomination value would be printed on the card and the merchant would be educated not to accept a card should the balance displayed be higher than the card's face value.
26. Mr CHAN also confirmed that the merchant terminals would not generate receipts for the transactions but sales receipts would be issued by merchants as usual. The customers could check the amount deducted from the balance reader on completion of the transaction.
27. The Chairman thanked Mr YIM, Mr CHAN and Mr CHABANEL for their presentation.
Hong Kong Foreign Exchange and Deposits Brokers Association
28. The Chairman welcomed Mr Denis CHEUNG Shiu-shing and Mr Benny LUK King-sang to the meeting.
29. At the invitation of the Chairman, Mr Denis CHEUNG explained the background and reasons for the request of a formal regulatory system for money brokers. At present there were only ten members and they were self-regulated under a Code of Conduct. Since the Hong Kong Foreign Exchange and Deposits Brokers Association (HKFEDBA) was only an industry body, it did not have authority to investigate allegations of malpractice or non-compliance with the Code of Conduct. As the Code did not have statutory backing, the executive committee of HKFEDBA would be exposed to potential legal liabilities if they censored a member for a breach of the Code. Furthermore, given the relatively small number of brokers and that they were actually competing with each other, the executive committee members could be accused of prejudice and conflict of interest in exercising censorship. In the light of the above, they would like HKMA to assume the authority to regulate money brokers.
30. Some members asked Mr CHEUNG to provide more concrete information on the nature and seriousness of the complaints of abuses or malpractice. In reply, Mr CHEUNG advised that there had been concerns about excessive entertainment and bribery by brokers to acquire business. There were also situations giving rise to conflict of interest whereby the broker firm also owned foreign exchange companies. As it was difficult for HKFEDBA to conduct independent investigations on such allegations, it could only enlist the co-operation of members to refrain from misbehaviour. To ensure that Hong Kong could maintain its reputation as an international financial centre, the HKFEDBA considered that a formal regulatory framework would be necessary to overcome the enforcement difficulties faced by HKFEDBA.
31. In reply to Mr Ronald ARCULLI, Mr CHEUNG elaborated on the problems encountered by HKFEDBA in screening applications or approving changes to ownership. He cited a hypothetical situation whereby a member firm proposed to sell its business at a unreasonably high price to a person of unscrupulous personality or doubtful background. In this case, the HKFEDBA found it difficult to reject the application for change of membership without running the risk of a lawsuit.
32. Responding to the Chairman's questions, Mr CHEUNG advised while it was the gentlemen's agreement that members of the Hong Kong Association of Banks would only deal with HKFEDBA members, non-HKFEDBA members could still take up business with overseas banks. On the impact of the proposed regulatory framework, Mr CHEUNG considered that it would enhance competition as newcomers would be allowed to enter the market if they could meet the approval criteria of the HKMA. At present, HKFEDBA set a limit of eleven members for the Association since the volume of business could not support an unlimited number of money brokers.
33. As regards the proposed requirement for a money broker to have adequate financial resources to carry out the business, Mr CHEUNG advised that whilst the business was not capital intensive, a cash reserve would be necessary to provide confidence to persons dealing with the broker.
34. The Chairman thanked Mr CHEUNG and Mr LUK for their views.
35. There being no other business, the Committee adjourned at 10:50 am.
23 November 1996
Last Updated on 14 December 1998