Paper for the Bills Committee
Banking (Amendment) Bill 1996
HKMA's Response to the Consumer Council's Submission
1. HKMA's response to the comments made by the Consumer Council (the Council) in its submission to the Bills Committee on the Banking (Amendment) Bill 1996 are set out below.
2. The first point to make is that the Bill does not seek to address all the issues relating to stored value cards or electronic money in general. It should be seen as the first step in putting in place a regulatory framework which may need to be further developed as use of electronic money expands. Moreover, the regulatory framework has to work within the ambit of the Banking Ordinance. It provides therefore for an authorization regime and prudential measures which are directed primarily at maintaining the stability of the payment system and hence of the banking system as a whole. The Banking Ordinance is not directly concerned with issues of consumer protection or competition which are the main focus of the Consumer Council.
3. Having said this, it is right that we should respond to the various points raised in the Consumer Council's letter. In particular, security for funds and prevention of forgery are issues which relate both to the Council's consumer protection role and the Monetary Authority's concern with the stability of the payment system. Obviously, if individuals who have placed money with the issuer of a stored value card suffer loss, or if an issuer gets into difficulties because of the introduction of forged value, this may lead to a loss of confidence not only in that particular card but also in similar cards. Taken to an extreme, this could damage the retail payment system and the banking system.
Security of funds
4. We agree with the Council, for the reason set out above, that the funds paid by consumers to purchase electronic value must be secure. However, we query the Council's premise that the funds should be more protected than deposits. The fact that the funds placed with card issuers will not attract interest cannot be the sole criterion. Deposits placed on current account do not receive interest and yet do not rank ahead of other types of deposit in terms of protection. In any case, "interest" is not the only way in which customers receive a return. Money is a medium of exchange as well as a store of value; and, as with current accounts, stored value cards will offer a return to their holders in the form of added convenience for making payments.
5. That said, we should obviously try to make stored value cards as secure as possible without imposing such a heavy regulatory burden that the market will be stifled at birth. Were this to happen, the Consumer Council's objectives of trying to promote competition and to prevent barriers to entry would be frustrated. It is for this reason, for example, that we have proposed an exemption for financially sound non-bank issuers of cards which can store only a limited maximum value (say $1,000). Clearly, to allow this will entail some element of greater risk for cardholders, but this will help the market to develop and the risk should be quite small.
6. The precise measures that will protect the value stored on multi-purpose cards have not yet been finalised. However, we consider that the proposed legislation will enable sufficient protection to be provided. In particular, as acknowledged by the Consumer Council:
- all issues of multi-purpose cards (other than those which are exempt) will be made by authorized institutions. The same type of prudential requirements (e.g. capital and liquidity ratios) and oversight which apply to deposits will apply to the electronic value stored on the cards;
- where the value stored on cards issued by banks falls within the definition of "deposit" under the Banking Ordinance* , it will be afforded the same priority as applies to other deposits through the preferential payment provision under section 265 of the Companies Ordinance;
- the Monetary Authority has the power to impose requirements relating to the management and segregation of the float backing the electronic value issued.
7. The question is whether anything more needs to be done at this stage. In particular, the Consumer Council raises the point as to whether all funds received from the issue of stored value should be placed in a trust account. The HKMA has considered this and, while it has not been totally ruled out, our thinking at this stage is that it would be difficult to justify. Our reasoning is as follows:
- in the case of cards where the value is originated and issued by the bank itself (as with the Visa scheme), the effect is simply to cause a shift from one liability of the bank (e.g. demand deposits) to another (liability for stored value). Given that demand deposits are not given trust account protection, we see no reason to afford this to electronic value. If the creditworthiness and balance sheet of the bank is considered sufficient to support deposits, it should be sufficient to support electronic value# ;
- in the case of the Mondex-type scheme, all the electronic value is originated by one entity. Because of this, there is more justification for a trust account approach. But our thinking is that in the early stages at least, it will be sufficient for the originator to be a special purpose vehicle (thus with only a limited number of other creditors with potential claims on its assets) and for the assets to consist of Exchange Fund paper or deposits with the Exchange Fund. This will eliminate credit risk, leaving market risk on the assets (which would not be eliminated by a trust account) to be protected by the capital ratio requirement;
- non-bank issuers of multi-purpose cards would similarly be required to set up special purpose vehicles. They would not be allowed to engage in the taking of deposits from the public or lending activities. Again, this would mean that there would not be any other major creditors who would have a claim on the vehicle's assets.
8. Our comments on the points raised by the Council are as follows (in the same order as in its letter):
- electronic value is akin to cash. There is absolutely no protection if a person loses banknotes and there is usually no means of linking that person to the banknotes in question (unless they are contained in a wallet with identification in it). Depending on the type of card, stored value cards will have certain advantages in this respect. For example, the Mondex card must be linked to a particular bank account. Thus, a lost card could be handed in to the bank which issued it and returned to the genuine owner. Moreover, the card itself can be "locked" to prevent unauthorized access, thus increasing the chances that a lost card would be returned to the bank. This protection would not however apply in the case of purely disposable cards;
both the Visa and Mondex systems allow cardholders to verify the unused balance on the cards at ATMs and other card reader devices;
- cards will have a variety of systems to protect against forgery. The HKMA will require card issuers to demonstrate that their cards have adequate chip security, encryption and risk management procedures;
- we are not aware of multi-purpose card schemes which attempt to limit the liability of the issuer to redeem electronic value which has been acquired by the holder in good faith. In this respect, electronic value is superior to cash where the holder of counterfeit banknotes is liable to meet the loss. Card issuers will have no liability in respect of lost cards, but as noted above the chances of a lost stored value card being returned are better than with cash and, unlike a credit card, the potential loss of the cardholder is limited to the amount actually stored on the card;
- issuers of multi-purpose cards will be subject to the provisions of the Personal Data (Privacy) Ordinance when it comes into operation;
- as regards the other points raised by the Consumer Council, we agree that cardholders should be given clear and accurate information on such matters as the use that may be made of the card and the procedures for dealing with complaints from cardholders and disputes over the amount of value stored on the card. It may be possible to deal with such matters in the Code of Banking Practice which is currently being drafted in consultation with the banking industry.
9. In developing the criteria for authorization or exemption of card issuers, the HKMA has sought to ensure that such criteria are no more than are necessary to protect the payment system (and cardholders). We have tried to avoid excessive regulation which may stifle product innovation and competition. It is certainly not our intention to raise artificial barriers to entry. Having said that, as noted earlier, there is some trade-off between ease of entry and consumer protection.
10. As regards the Council's proposed competition clauses, the HKMA recognizes the merit from the consumer's point of view of open competition. However, further consideration would have to be given as to whether it was appropriate to use the Banking Ordinance to prohibit anti-competitive clauses as a condition of authorization. Our current advice is that, unless anti-competitive practices actually have negative implications for the stability of the banking system or depositors' (and cardholders') interests generally, formal regulation of such commercial matters would probably be outside the remit of the HKMA under the Banking Ordinance.
Hong Kong Monetary Authority
8 October 1996
* -- A deposit is defined as :
" a loan of money -
- at interest, at no interest or at negative interest; or
- repayable at a premium or repayable with any consideration in money or money's worth......"
# -- Note that the Visa scheme also involves a loss-sharing arrangement whereby in the event of the failure of a member bank which has issued a stored value card, cardholders would be compensated for any shortfall in the amount they received in a liquidation of the failed bank.
Last Updated on 15 December 1998