LegCo Paper No. CB(1) 155/96-97
(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, 18 September 1996 at 8:30 a.m.
in Conference Room B of the Legislative Council Building
Members present :
Dr Hon HUANG Chen-ya, MBE (Chairman)
Hon Ronald ARCULLI, OBE, JP
Hon Ambrose LAU Hon-chuen, JP
Dr Hon LAW Cheung-kwok
Hon SIN Chung-kai
Hon NGAN Kam-chuen (Non-Bills Committee member)
Members absent :
Dr Hon David K P LI, OBE, LLD (Cantab), JP
Hon Paul CHENG Ming-fun
Hon Mrs Elizabeth WONG, CBE, ISO, JP
Public Officers Attending :
- Mr Albert K C LAM
- Principal Assistant Secretary for Financial Services
(Banking & Monetary)
- Mr G A FOX
- Senior Assistant Law Draftsman
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
Clerk in Attendance :
- Mrs Constance LI
- Chief Assistant Secretary (Finance Committee)
Legal Adviser in Attendance :
- Ms Kitty CHENG
- Assistant Legal Adviser 2
Staff in attendance :
- Mr Matthew LOO
- Senior Assistant Secretary (1)7 (Atg)
Confirmation of minutes of previous meetings
The minutes of the first meeting of the Bills Committee held on 17 July 1996 were confirmed.
2. Dr HUANG Chen-ya and Mr SIN Chung-kai disagreed with the Administrations proposed amendments in paragraphs 3(b) and 4 of the draft minutes of the meeting held on 18 July 1996. As the amended version proposed by the Administration was somewhat different from the Committees understanding of the arrangements for deposit-taking companies (DTC) authorized to issue stored value cards (SVC), the LegCo Secretariat would clarify with the Administration on the amendments before confirmation of the minutes of the 18 July meeting.
3. Members noted that a total of three submissions were received from the local tertiary institutions, one from the University of Hong Kong and two from Lingnan College. The submissions had been circulated to members before the meeting, and the Administrations comments on these submissions were tabled for members reference.
Meeting with the Administration
4. Members noted that the Hong Kong Monetary Authority (HKMA) and the Inland Revenue Department had provided the following information papers which were circulated to members before the meeting:
- Further information and revised Committee Stage Amendments (LegCo Paper No. CB(1)2035/95-96(01)); and
- Tax liabilities of money brokers (LegCo Paper No. CB(1)2035/95-96(02)).
5. At the invitation of the Chairman, Mr David CARSE briefed members on LegCo Paper No. CB(1)2035/95-96(01) prepared by HKMA.
Rationale for regulating the issue of multi-purpose cards
6. Mr CARSE advised that the nature of multi-purpose cards and the reasons for regulation were detailed in Annex 1 of LegCo Paper CB(1)2035/95-96(01). The proposed legal framework was in line with the thinking of most European countries. In this connection, the Chief Executive of HKMA recently attended a meeting in Switzerland convened by the Bank of International Settlements (BIS) which had conducted a lot of research on the subject. On the approach of regulation, BIS considered it essential to have flexibility in dealing with different stored value card (SVC) schemes. The legal framework proposed in Hong Kong would be consistent with this approach.
7. On the difference between a SVC and a debit card, Mr CARSE advised that SVC was akin to cash while a debit card was like a cheque with a magnetic strip. Mr Ronald ARCULLI commented that if SVC would only be issued by banks and since bank operations were already under legislative control, it would not be necessary to introduce special legislation to control the issue of SVC. Mr CARSE replied that based on legal advice, it was not clear that the definition of deposits in the existing legislation in Hong Kong covered SVC; it was therefore necessary to introduce the bill to put it beyond doubt that SVC were within the scope of the legislation. The proposed legal framework would also cater for non-bank issuers and the different types of medium for the issue of SVC.
Issue of stored value cards by deposit-taking companies (DTC)
8. Referring to a members suggestion at the last meeting that a generic term could be given to those DTCs authorized to issue SVC, Mr CARSE considered that a separate term would not be necessary as DTCs were at present already performing a wide range of business, and it would not cause confusion for certain DTCs to be involved principally in the issue of multi-purpose cards.
Regulations for the issue of SVC in other countries
9. Mr Ronald ARCULLI enquired whether there were variations in the regulatory approach in the European countries and what were their impacts on the issue of SVC in these countries. In reply, Mr CARSE advised that these countries basically adopted the recommendations of the European Monetary Institute (EMI) in 1994 that the issue of MPC should be restricted to authorized financial institutions. Most continental European countries, except Switzerland, agreed that SVC should only be issued by credit institutions (which referred to banks) as defined in the banking directive of the European Union. While some European countries were of the view that they could rely on the existing legislation to restrict the issue of SVC to credit institutions, some countries such as Germany and the United Kingdom (UK) were actively considering amending the legislation to regulate the issue of SVC. Germany was proposing to restrict the issuers of SVC mainly to credit institutions, but exemptions might be given to some smaller schemes subject to certain conditions such as a ceiling on the value to be stored on the card. As for UK, as there were practical difficulties in getting a slot in the legislative programme, it was currently relying on the bank supervisory functions to monitor existing schemes such as the Mondex.
Projections on the circulation of electronic money
10. In reply to Mr SIN Chung-kai, Mr CARSE advised that it would be difficult for HKMA to give a forecast on the circulation of electronic money in Hong Kong based on the experience of other countries. Unlike some European countries, Hong Kong is a small place and with its level of financial sophistication, there can be a higher potential for the development of SVC. The circulation of electronic money of this kind would depend on several factors such as the acceptability of SVC and the degree of exemption to issuers of SVC in Hong Kong. It was possible that the originators of SVC might have their own forecasts of the demands in Hong Kong, but such commercial sensitive information was not available to HKMA.
11. On the need to restrict the amount of electronic money in circulation in the first few years of introduction, Mr CARSE advised that the Administration did not intend to restrict the circulation of electronic money as an end in itself, and there was no pre-conception on the amount of electronic money allowed for circulation. As the regulation of SVC was mainly for supervisory reasons, the proposed four-tier regulatory system for SVC would have served the purpose.
Liabilities of the originators of SVC
12. Members were concerned about the protection to SVC users if the originators of SVC became bankrupt. Mr CARSE advised that in the case of the Mondex scheme, the Mondex value issued must have sufficient backing in a liquid and safe form to enable reimbursement to be made to SVC holders in the event of bankruptcy. In the Visa/Master Card system, the liability of issuing banks would be supported by the assets held, and the arrangement would be the same as deposits placed with banks. He pointed out that under Clause 7 (f) of the gazetted bill, HKMA proposed to impose requirements on the administration, management, regulation and use of those moneys paid to the authorized institutions for facilitating the issue of multi-purpose cards. The Administration considered such statutory control adequate for the purpose.
13. Referring to the requirement for electronic money to be backed by Exchange Fund Bills and Notes [para. 4 in Annex 3 of LegCo Paper CB (1)2035/95-96(01)], Mr Ronald ARCULLI asked whether it would create a duplication of backing as electronic money was only a substitution of banknotes which already had backing in the Exchange Fund. In reply, Mr CARSE advised that HKMA did not require special arrangement for the float received under the Visa scheme as the claims on issuing banks would remain unchanged and issuing banks were already subject to the liquidity ratio requirement, etc. There would only be a change in the composition of the liabilities switching between deposits (banknotes) and other liabilities (electronic money), and the question of duplicated backing would not arise. For the Mondex scheme, as originators played a role similar to banknote issuers, it would be necessary, for banking supervision and customer protection reasons, to ensure that the originator had sufficient assets to redeem the Mondex value issued. HKMA considered that these assets should be liquid and reasonably free from credit or market risks, and backing by Exchange Fund Bills and Notes would be appropriate. As the proceeds obtained by the Exchange Fund would mostly be converted into US dollar assets, this would also be consistent with the currency board arrangement. At the same time, this addressed the concern expressed by some central banks, according to the BIS report, that their balance sheet might shrink due to the issue of electronic money, hence undermining their ability to conduct monetary operations. Mr CARSE further advised that it was necessary to require issuers of electronic money to maintain proper records on the issue of electronic money which substituted banknotes in order to fill the statistical gap in respect of money supply. As to whether the bill provided sufficient authority to this effect, Mr CARSE advised that the conditions for authorization would include the requirement to provide statistical information. While the requirement was not specified in the bill, it would be included in the set of authorization conditions which would have statutory effects on the issuers.
Authorization and exemption criteria
14. Following up on the point raised at the last meeting as to whether regulatory control would be imposed on SVC with a small value, Mr CARSE advised that the Administration was deliberating on the exemption and authorization criteria for SVC. Basically, the Administration would be prepared to exempt those cards with a small value and for a limited usage, and the intention was to regulate the issue of multi-purpose cards only.
15. Mr CARSE undertook to provide an information paper to the committee before the next meeting on the classification of the SVC and the authorization and exemption criteria.
Interests accrued from the deposits placed with SVC issuers
16. Mr CARSE agreed with Dr LAW Cheung-kwok that it was possible that note-issuing banks might actively promote their SVC schemes in view of the profits generated by the interests accrued from the deposits paid by card holders. The Administration recognized the potential loss of seigniorage, but there was no plan at the moment to impose control in this area in order not to stand in the way of technological innovation. Requiring electronic money which resembled bank notes to be backed by Exchange Fund papers would be adequate at the present stage.
Technical requirements for the issue of SVC
17. On the security requirements for the issue of SVC, Mr CARSE advised that HKMA would look at the security of the SVC scheme as a whole including the card design, the chips and the communication device, in order to prevent injection of false electronic money into the market. As technology was moving fast, it would be impractical to specify detailed security requirements in the bill or in the guidelines for issuers. The Administration would nevertheless require the issuers to obtain a report from recognized consultants with an evaluation on the security aspects and the internal control procedures of the scheme. For issuers of Mondex value, they would also be subject to the annual audit by the originator. Members noted that while the US did not regulate on this aspect, the UK adopted a similar approach as in Hong Kong requiring issuers to incorporate security arrangements in the scheme.
18. Mr SIN Chung-kai asked whether it would be possible to specify the requirements under Clause 7 (f)(iii) which were to be imposed by HKMA on the issuers of multi-purpose cards. Mr CARSE advised that HKMA would impose specific requirements in the guidelines to SVC issuers on aspects such as float management, system security and risk management. Members appreciated there were practical difficulties to specify all technical requirements as this would restrict the flexibility to keep pace with the rapid developments of the market. It was agreed that the committee would first discuss the general conditions for authorization and exemption based on the information paper to be prepared by HKMA. When the general conditions were agreed by the committee, the Administration would work out the details of the guidelines for members reference.
19. Mr CARSE also undertook to provide members with a copy of the BIS report on security of electronic money schemes.
Authorization system for money brokers
20. On the tax implications of the proposed regulatory system for money brokers, members noted the information paper prepared by the Inland Revenue Department (LegCo Paper No. CB(1) 2035/95-96(02)) which confirmed that there were no tax implications before and after the proposed regulatory regime.
21. Dr HUANG Chen-ya remarked that according to the paper prepared by HKMA (Annex 4 of LegCo Paper No. CB(1)2035/95-96(01)), the role of money brokers was primarily that of a matchmaker and a name-passer. If that was the case, he was doubtful about the need to introduce a formal regulatory system for money brokers. In response, Mr CARSE explained that money brokers were at present self-regulated under a Code of Conduct. The proposed regulation which aimed at formalizing the existing Code of Practice, was requested by the Hong Kong Association of Banks (HKAB) and supported by the Hong Kong Foreign Exchange and Deposit Brokers Association (HKFEDBA) which preferred to have legal backing for taking disciplinary measures. On the role of money-brokers, Mr CARSE clarified that money brokers could have influence in the transactions, and the business was not entirely risk free. To prevent unethical trading and to provide for contingent liability for mistakes, it would be in the interest of the trade to introduce a formal regulatory system.
22. On the question of over-regulation, Mr CARSE advised that the Administration had always encouraged self-regulation and internal control with minimum regulation. He stressed that the proposed regulation (as set out in the Eleventh Schedule of the bill) was initiated by the industry itself and there was definitely no intention to set any barrier for people or companies intending to join the trade.
23. Dr HUANG Chen-ya considered that the Administration should provide further information on the reasons for regulation with reference to the various requirements in the Eleventh Schedule of the bill. Mr CARSE also undertook to provide the following additional information:
- the existing Code of Conduct for money brokers;
- letters from the HKAB to the Administration regarding their request for the introduction of a formal authorization system for money brokers;
- comments from the HKAB and HKFEDBA on the bill and the Administrations response.
Date of Next Meetings
24. Members noted that the next meeting would be held on 24 September 1996. Two further meetings were tentatively scheduled for 1 and 7 October 1996 at 8:30 a.m. in Conference Room B of the Legislative Council Building.
25. The meeting ended at 10:35 a.m.
17 October 1996
Last Updated on 15 December 1998