LegCo Paper No. CB(1) 659/96-97
(These notes have been seen by
Ref : CB1/BC/44/95
Bills Committee on
Banking (Amendment) Bill 1996
Minutes of meeting
held on Tuesday, 22 October 1996 at 8:30 am
in Conference Room B of the Legislative Council Building
Members present :
Dr Hon HUANG Chen-ya, MBE (Chairman)
Dr Hon David K P LI, OBE, LLD (Cantab), JP
Hon Ambrose LAU Hon-chuen, JP
Hon SIN Chung-kai
Members absent :
Hon Ronald ARCULLI, OBE, JP
Hon Paul CHENG Ming-fun
Dr Hon LAW Cheung-kwok
Hon Mrs Elizabeth WONG, CBE, ISO, JP
Member attending :
Hon NGAN Kam-chuen
Public officers 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
Clerk in attendance :
- Mrs Constance LI
- Chief Assistant Secretary (Finance Committee)
Staff in attendance :
- Ms Kitty CHENG
- Assistant Legal Adviser 2
- Mr Andy LAU
- Senior Assistant Secretary (Finance Committee)
Confirmation of minutes of previous meeting
The minutes of the meeting held on 18 September 1996 were confirmed.
Meeting with the Administration
2. Members noted that the Hong Kong Monetary Authority (HKMA) had, in response to members concern, provided an information paper (LegCo Paper No. CB(1) 154/96-97(01)) on whether false Mondex value could be created without the knowledge of HKMA, and on the safeguards in relation to multi-currency and cross-border use of Mondex value.
3. At the invitation of the Chairman, Mr David CARSE briefed members on the salient points of the paper.
Creation of Mondex value
4. Mr CARSE advised that Mondex value was manufactured on the instructions of an originator, within the Global Key Centre located in the United Kingdom. During the manufacturing process which was witnessed by the representatives of Mondex International and the originator, the encrypted electronic information (i.e. the electronic value) would be down-loaded to a tamper-resistant computer chip on the originators card. The latter would then be delivered to the originator by courier. Alternatively, the encrypted electronic information could be transferred to the originators card by telecommunication device. Un-issued Mondex value stored on the originators card did not have any purchasing power, just like banknotes printed but not issued in the vault of note printing plant. The Mondex value would only be activated upon transfer to the member banks purse against payment of the equivalent value by the member bank to the originator. Mr CARSE added that all Mondex value in Hong Kong dollar denomination would only be originated and issued by the local originator in Hong Kong, i.e. by the Hong Kong Bank during the soft launches of the scheme.
Multi-currency and cross-border use of Mondex value
5. Mr CARSE advised that HKMA had further discussed with the Hong Kong Bank on the subject. Multi-currency and cross-border uses would be the medium term development of the scheme and would not feature in the soft launches. HKMA would further discuss with the Hong Kong Bank the detailed procedures on settlement and operation in this respect when there was plan to launch such functions.
Security of Mondex Value
6. Members expressed concern about the security measures against creation of false value on computer chips, and the possible interference of the telecommunication network during the transfer of electronic value from the manufacturer to the originator or between the originator and the member banks. They asked if there was any means to detect false value stored on the card or chips. Mr David LI also pointed out that there was a report in the New York Times about the possibility to break the security system for electronic money.
7. In response, Mr CARSE assured members that HKMA was equally concerned about the security of such schemes. He said there was no single method that could provide complete protection of the scheme, and it would be necessary to introduce a combination of security measures or a system to reduce such risks. In this connection, HKMA would seek expert advice such as the report on security commissioned by the Bank of England. Mr CARSE further advised that various security measures had been developed to protect the integrity of the electronic money system. The encryption of electronic information before transmission and the tamper-resistant chips would make it very difficult to alter the data stored on such chips without authorization. There were also authorization processes to validate the electronic information transmitted. While agreeing that it would be difficult to provide 100% guarantee on the security of the system, Mr CARSE considered that sufficient safeguards could be put in place with the aid of new technology, and HKMA would further discuss with the Mondex originator on details of the security arrangements.
8. Since electronic value was invisible and that it would be difficult to detect forgery or fraudulent uses of such value, the Chairman asked whether there was any contingency plan in case of a substantial fraud. In reply, Mr CARSE advised there were already technical barriers against fraud. In the event of a huge fraud, the scheme would be closed and the electronic value would be withdrawn from circulation, as in the scenario of corrupt banknotes. In the case of Mondex value issued, the originator would redeem all unused Mondex value. In view of members concern about the security aspects of the system, the Chairman advised the Administration to discuss further with the Hong Kong Bank on the ways and means to identify and control any such risks and provide further information to the Bills Committee.
Backing of Mondex value
9. Concerning that the creation of Mondex value was not at present required to be fully backed by the US dollar as in the case of note-issuing, Mr David LI expressed concern that this might have implications on the money supply in Hong Kong. In response, Mr CARSE advised that, as discussed in a previous paper issued to members (LegCo Paper No. CB(1) 2035/95-96(01)), the monetary policy of HKMA did not aim at controlling money supply which was influenced by a number of external factors. It would be more important to maintain the integrity of the currency board system. As regards the backing of electronic value of the Mondex value, Mr CARSE advised that the special purpose vehicle responsible for the management of the Mondex scheme would be required to back Mondex value issued by Exchange Fund papers which were in turn backed by the foreign currencies assets held by the Exchange Fund. In so doing, the principle of the currency board arrangements would be upheld.
10. Mr David LI queried that some multi-purpose card schemes were allowed to operate prior to the enactment of the legislation. He was concerned that these schemes could get out of control. In response, Mr CARSE advised that the Administration had been aiming at early enactment of the legislation so that the issue of electronic money could be put under regulation. As the soft launches of the Mondex scheme and VisaCash were at present carried out by banks which were regulated under the Banking Ordinance, and in view of the small amount of electronic value issued, the Administration considered that this would not have significant impact on the payment system.
Clause by clause examination
11. The Chairman took the meeting through the Bill and the Committee Stage Amendments (CSAs) proposed by the Administration.
Clause 3 Definition of money broker
12. Mr CARSE explained that the legal framework was intended to cover both voice brokers and electronic brokers including those operating from overseas and providing services to clients in Hong Kong. As paragraph (a)(i)(A) and (B) had given adequate description of the core business of money brokers i.e. the making of deposits and purchase and sales of currencies, the purchase and sale of debt securities and certificates of deposits as described in paragraph (a)(i)(C) would be deleted. The Administration had also proposed a CSA to delete paragraph (a)(i)(C) from the definition of money broker in the Bill, so that unintended parties such as stock exchange brokers would not be caught within the net of the legislation.
13. The Bills Committee noted that HKMA already had the powers to specify by gazette other instruments for the purpose of the definition of money brokers under section 2(14)(a). The Chairman asked whether derivatives should be listed as a type of transactions performed by money brokers. Mr CARSE responded that derivatives would not be the core business of money brokers, but he agreed to examine the suggestion and provide further information to the Committee.
14. Members also noted the exemption in paragraph (b)(i) would be widened to cover persons who were acting as money brokers wholly ancillary or incidentally (instead of ancillary as proposed in the Bill) to their main business which was the business of money broking. This would exclude persons like solicitors and accountants who might on occasions have to arrange placement of deposits on behalf of their clients.
15. Members noted that paragraph (B)(ii) was a fall-back provision, allowing an exemption declaration to be made by gazette in case a person was inadvertently included in the regulatory framework.
Clause 3 Definition of single-purpose card
16. Mr CARSE advised that upon further deliberations, the Administration now proposed to revert to the original proposal that all single-purpose cards should not be subject to regulation. As explained in a previous meeting, the Administration considered that single-purpose cards were in fact similar to pre-payment of goods and should not therefore be brought within the Banking Ordinance. The Administration decided to withdraw the CSA which proposed setting a limit on the amount of stored value of single-purpose cards to HK$1,000, and the proposed Fourteenth Schedule would also be deleted.
Clause 3 Definition of stored value card
17. Responding to members questions, Mr CARSE advised that while the definition basically catered for the card-based system, it also covered the possible use of magnetic and optical media. As regards the possibility of electronic banking, the Administration would deal with the issue as it arose.
18. In response to Mr SIN Chung-kai, Mr CARSE explained that HKMA could exempt multi-purpose cards below a certain value (say HK$1,000) from the regulatory requirements under the Banking Ordinance. The list of exempt cards would be declared by gazette notice and subject to the negative vetting procedures of the Legislative Council. HKMA would issue guidelines on the exemption criteria which had been discussed by the Bills Committee at a previous meeting.
Clause 4 Functions of HKMA
19. Members noted that by including money brokers in Section 7(2)(c), HKMA would also be responsible for the promotion of proper standards of conduct and business practices amongst money brokers.
Clause 5 New Section 14A - Only authorized institutions may issue, etc. multi-purpose cards
20. Members noted that apart from the authorized institutions, special purpose vehicles might be authorized as deposit-taking companies (DTC) for the issue or facilitating the issue of multi-purpose cards. The new Section 14A would disapply the deposit-taking restrictions on the amount and maturity of deposits currently applied to DTCs under Sections 11, 12 and 14 of the Banking Ordinance.
21. On the level of fines, members noted that the level of fines has been revised recently to reflect inflation and to maintain the deterrent impact. The new Thirteenth Schedule would specify the level of fines for offences under this Ordinance.
22. In response to the Chairman, Mr CARSE advised that any person responsible for the uploading of electronic value onto a stored value card would be regarded as facilitating the issue of a stored value card. The creation of forged value or fraudulent uses of cards were criminal offences punishable under other Ordinances. He undertook to provide further information on the relevant Ordinances for forgery of this kind.
Clause 6 Application for authorization, etc
23. The Bills Committee had agreed that special purpose vehicles should only apply as DTCs but not as Restricted Licence Banks.
Clause 7 Grant or refusal of authorization, etc.
24. On the question why the authorization conditions were not set out in the form of subsidiary legislation as in the case of declarations of exemptions, Mr CARSE explained that to exempt an issuer from regulation would be an important decision which HKMA would like to seek the approval of the Legislative Council. As regards the detailed regulatory requirements, HKMA considered that, to allow HKMA to respond promptly to market changes, it would not be appropriate to go through the subsidiary legislation process every time the conditions were to be changed. Nevertheless, he assured members that interested parties would be consulted on changes to the regulatory conditions. Institutions aggrieved by the conditions imposed by HKMA could appeal to the Governor-in-Council or request for a judicial review.
25. On the backing of electronic value, Mr CARSE advised that the proposed amendment to Section 16(9) would empower HKMA to impose requirements on issuers in respect of the administration and management of funds paid by card-holders, and the separation of funds from the other funds held by the issuer. Such requirements, if imposed, would be included in the licensing conditions to the authorisation of the issuers. As regards the backing requirements for Mondex value, HKMA would shortly discuss with the originator having regard to the market development, and would provide further information on such requirements before enactment of the legislation. Responding to the Chairman, Mr CARSE confirmed that general conditions were also imposed by the Financial Secretary on note-issuing banks under the Bank Notes Issue Ordinance.
Clause 8 & 9 revocation and suspension of authorization
26. The proposed amendments were agreed by the Committee.
Clause 10 Powers of Monetary Authority
27. Mr CARSE explained that the proposed amendment was to enable HKMA to react to financial crisis promptly, by dispensing with the requirement of an investigation under Section 55, or the submission of a report under Section 59(2) or 63(3A), in exercising its powers in respect of an authorized institutions. He assured members that in exercising such powers, HKMA would consult the Financial Secretary and took due care of the interests of the affected parties.
Clauses 11,12 &13
28. The Committee noted that the proposed amendments were to extend the existing provisions on the monitoring of authorized institutions to cover money brokers.
Clause 14 New Part XXA Money Brokers
Clause 24 Eleventh and Twelfth Schedules
Clause 20 Section 134B Monetary Authority to consult, etc.
29. Members noted that the provisions in the new part governing the regulation of money brokers were similar to those applied to authorized institutions. As regards regulation of electronic brokers based outside Hong Kong, HKMA would have to rely on the opinion of the relevant overseas supervisor of the money broker. The Eleventh Schedule set out the minimum criteria for approval as a money broker, and the Twelfth Schedule gave the grounds for revocation of such approval.
30. Responding to the Chairmans question about the coverage of the paid-up share capital requirement, e.g. fixed assets, Mr CARSE explained that the requirement was to ensure the financial soundness of the broker and was in line with the existing requirement of the money brokers association. He assured members that the requirement would not be a barrier to entry. He agreed to provide further information on the coverage of such capital requirement in practice. HKMA would also issue guidelines to money brokers on the detailed requirements.
31. With regard to the transitional arrangements for money brokers awaiting HKMA approval after the enactment of the legislation, Mr CARSE advised that money brokers would be allowed three months to apply for authorization from the date of commencement of the Banking (Amendment) Ordinance 1996. They could continue with their business meanwhile subject to the conditions set by HKMA. Unsuccessful applicants will be required, upon notification, to cease business within 14 days (or a longer period as specified by HKMA). Members also noted that the new Section 134B would require HKMA to consult the Hong Kong Foreign Exchange and Deposit Brokers Association before attaching any conditions to the certificate of approval, and views of individual approved money broker might be heard by HKMA.
Clause 19 New Sections 132A & 132B
32. Members noted that the new Section 132A consolidated all appeals provisions in the Banking Ordinance into one section for easy reference, whereas the new Section 132B indicated that where a fine was referred to a particular tier, the amounts of fines were shown in the new Thirteenth Schedule.
Clause 12A Section 61
33. In response to members, Mr CARSE advised that Section 61 was amended to provide statutory protection for the auditor or former auditor of a money broker or a former money broker to communicate in good faith to HKMA on matters such as deficiencies in internal control or conduct of business. This new provision mirrored those provisions now applied to auditors of authorized institutions.
Power to exchange information
34. As regards whether HKMA could rely on Section 121 to exchange prudential information with overseas regulators on authorized institutions and money brokers, Mr CARSE would seek legal advice in this respect.
Protection of deposits
35. In response to members comments at previous meetings, Mr CARSE would further examine if funds placed with the card-issuer for the purchase of stored value could be regarded as a type of deposits for the purpose of Section 265 of the Companies Ordinance so that such funds would be afforded preferential payment in the liquidation of a company.
Date of next meeting
36. Two further meetings were tentatively scheduled for 1 & 8 November 1996 at 8:30 am.
37. There being no other business, the meeting was adjourned at 10:30 am.
9 January 1997
Last Updated on 15 December 1998