LegCo Paper No. CB(1) 2074/95-96
(These notes have been seen by the Administration)
Ref : CB1/BC/44/95
Bills Committee on
Banking (Amendment) Bill 1996
Minutes of Meeting
held on Wednesday, 17 July 1996 at 12:00 noon
in Conference Room B of the Legislative Council Building
Members Present :
Dr Hon HUANG Chen-ya, MBE (Chairman)
Dr Hon David LI Kwok-po, OBE, LLD, JP
Hon Ronald ARCULLI, OBE, JP
Hon Ambrose LAU Hon-chuen, JP
Dr Hon LAW Cheung-kwok
Hon SIN Chung-kai
Hon Mrs Elizabeth WONG CHIEN Chi-lien, CBE, ISO, JP
Member Absent :
Hon Paul CHENG Ming-fun
Public Officer Attending :
- Mr Albert K C LAM
- Principal Assistant Secretary for Financial Services
(Banking & Monetary)
Attendance by Invitation :
- Mr David CARSE
- Deputy Chief Executive (Banking),
Hong Kong Monetary Authority
- Mr Raymond LI
- Executive Director (Banking Policy),
Hong Kong Monetary Authority
Legal Adviser in Attendance :
- Ms Kitty CHENG
- Assistant Legal Adviser 2
Staff in Attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
- Mrs Constance LI
- Chief Assistant Secretary (Finance Committee)
- Miss Anita SIT
- Senior Assistant Secretary (1)6
- Mr Andy LAU
- Senior Assistant Secretary (Finance Committee)
Election of Chairman
Dr HUANG Chen-ya was elected as Chairman of the Bills Committee.
Meeting with the Administration
2. At the invitation of the Chairman, Mr Albert LAM briefed members on the proposed legislative timetable for the Banking (Amendment) Bill 1996 (the Bill), highlighting its urgency in the light of the recent development in the market. He advised members that certain potential issuers of smart card would launch their products in the third or fourth quarter of this year. As such, the Administration would like to ensure that the regulatory framework was in place as soon as possible. In response, members remarked that as Hong Kong would be one of the fore-runners in introducing such a legal framework and that the operation of smart card would have far-reaching effects, the Committee would need to examine thoroughly the implications and the technicalities of the regulation before recommending the passage of the Bill.
3. At the invitation of the Chairman, Mr David CARSE briefed members on the main purpose and scope of the Bill as described in the Legislative Council Brief dated 22 May 1996.
Stored value cards (SVCs)
4. On the classification of SVC, Mr CARSE advised that it could be broadly classified into two types: single-purpose SVCs (SPs) and multi-purpose SVCs (MPs). SPs were those which might be used only for the purchase of goods or services provided by the issuer of the SVC, such as that currently issued by the Hong Kong Telecom. MPs were those which might be used to pay for a variety of goods and services provided by third parties. As far as Hong Kong was concerned, there were two major MP systems being developed : the Mondex and Visa/MasterCard systems.
5. Mr CARSE then briefed members on the Mondex system. In essence, Mondex was akin to electronic cash. Mondex users could transfer money from their bank account to their Mondex card by ATM machine or telephone. The Mondex card could then be used for payment of goods and services. By means of an "electronic wallet", Mondex value could also be transferred from person to person. As far as the local Mondex scheme was concerned, the Hong Kong and Shanghai Banking Corporation Limited (the Hong Kong Bank) would initially perform the role of the originator of Mondex value and would hold the central pool of funds which backed the stored value in circulation. As for the VISA/MasterCard system, it was more akin to electronic demand deposits and each participating financial institution would issue its own stored value. The VISA/MasterCard system would have an audit trail as every transaction made on the card would be recorded and transmitted via the VISA network for clearing purpose. Visa would maintain an archive file which provided auditability and accountability.
6. On the differences between a SVC and a credit card, Mr CARSE explained that as the holder of a SVC would have to deposit with the issuing company by making a pre-payment of the full value of the card, it would be for the card holder to bear the credit risk; whereas in the case of credit card-holders, credit facilities were granted by the financial institution and the credit risk would rest with the lending institution. The proposed legislation was not intended to cater for "lending" activities of this type.
Need for a legal framework
7. A member expressed reservations on the need to regulate the issuing of MPs and he was not convinced that only authorized institutions should be allowed to issue MPs. He was concerned that, with the new regulation, the market might be monopolized by established banks which would have a competitive edge over other institutions in view of their well-developed service network and wide range of services provided. He was of the view that should any regulation be considered necessary, it should simply take the form of introducing a statutory ceiling (say HK$1,000) for the value that could be stored on a MP. This should effectively reduce the credit risks to be taken by a card holder.
8. In reply, Mr CARSE advised that MPs were akin to money and were in effect a new electronic payment system. The broader the range of goods and services in respect of which a MP could be used, the more it was like money. To preserve the integrity of the operation of the existing payment system which was now confined to licensed banks, they considered it appropriate to restrict the issue of general-purpose MPs to only licensed banks. To impose a ceiling on the value that could be stored on a MP issued by a banking institution was incompatible with the fact that currently there was no ceiling for current accounts.
9. On the proposed extension of existing regulations for authorised institutions to issuers/facilitators of MPs, Mr CARSE advised that the operations of MPs were similar to banking business in that the money received by the issuers of MPs was akin to a deposit, and the creation of value to be stored in MP (as in the case of Mondex) was similar to the issuing of banknotes. These regulations would also empower HKMA to lay down conditions for the management of the "float" (i.e. money received by the facilitator/issuer in return for the value issued) by the MP-issuing companies. The purpose of these regulations was to safeguard the public interests of the stability of the financial system and the protection of the individual depositors, since a defaulted issuer could give rise to a confidence crisis affecting other issuers and therefore the payment system.
10. Mr CARSE further advised that a simple three-tier structure would be introduced to govern the issuing of SVCs.
11. At the first tier, the issuing of SPs for specific goods and services were currently not subject to regulation. However, in view of the comment of the Legislative Council Panel on Financial Affairs on the need to strengthen protection for card-holders, the Administration was now considering a Committee Stage Amendment to specify a maximum limit on the value that could be stored on a SP under tier one. The initial thinking was to set the amount at HK$1,000.
12. The second tier would involve those SVC issuers where a statutory exemption might be considered acceptable, having regard to the relationship between the range of goods and services to be provided and the core business of the issuer, as well as the value to be stored on the card. An example would be the initial phase of the Creative Star Scheme which was mainly for payment of public transport services. The regulation was to enable HKMA to collect statistical information and to impose certain control over non-bank issuers whilst providing the flexibility for them to issue SVCs.
13. At the third tier, the proposed framework also catered for the issue of MPs by special purpose vehicles (SPVs) by allowing them to apply for authorization as a restricted licence bank (RLB) or deposit-taking company (DTC) for the principal purpose of being approved to issue/facilitate the issue of MPs. The second phase of the Creative Star scheme to be introduced by the public transport operators (initially for ticketing purposes but which might be expanded to become a MP) would be one of these types.
Legal Framework in other jurisdictions
14. As regards the experience in other jurisdictions, Mr CARSE advised that Singapore had already legislated along the lines similar to those proposed by HKMA. Central banks of most of the European countries agreed with the principle that only banks and some types of deposit-taking institutions should be permitted to issue MPs, although no legislative framework was being proposed at the moment.
15. On the need to create separate SPVs under the legislation, Mr CARSE advised that it would facilitate HKMA in supervising the operation of MPs, in particular the management of the float. HKMA might also require issuers to report to the HKMA the value and number of SVCs issued (or being issued) for monitoring purpose.
16. A member asked if it would be more appropriate to introduce a separate class of authorized institutions, hence a separate regulatory framework for SPVs, rather than extending the regulatory framework for RLBs or DTCs to these issuers/facilitators of MPS. In reply, Mr CARSE advised that the present proposal would obviate the need for making duplicated provisions in the Banking Ordinance since the provisions for RLB/DTC and SPVs would be similar. However, members considered that the proposed arrangement would cause confusion to the general public as an existing RLB or DTC could set up a SPV for the purpose of issuing MPs, and similarly, a SPV could also engage in the business of RLB or DTC. That would give rise to a situation whereby a financial institution under the name of RLB or DTC might be operating two separate businesses. (i.e. RLB/DTC and/or MP).
17. After discussion, the Chairman concluded that there were diverging views expressed by members and that a member had doubts on the need for regulation. To address these concerns, he suggested the Administration provide further information on the justifications for a formal legal framework and, where possible, a brief on the operation of MPs.
Date of next meeting
18. The next meeting would be held on Thursday, 18 July 1996 at 8.30 am to continue discussion with the Administration.
19. The meeting ended at 1.00 pm.
Legislative Council Secretariat
16 September 1996
Last Updated on 15 December 1998