LegCo Paper No. CB(1) 505/96-97
Ref : CB1/BC/44/95
Paper for the House Committee meeting on 20 December 1996 Report of the Bills Committee on the Banking (Amendment) Bill 1996
This paper reports on the deliberations of the Bills Committee on the Banking (Amendment) Bill 1996 and seeks Members support for the Bill to resume its Second Reading debate on 8 January 1997.
2. The Bill seeks to:
- introduce the definitions of "stored value card" (SVC), "multi-purpose card" and "single-purpose card" and to provide the Hong Kong Monetary Authority (HKMA) the power to declare a SVC not to be a SVC for the purpose of the definition of multi-purpose card";
- introduce a legal framework for the regulation of the issue or facilitating the issue of multi-purpose SVC;
- introduce a legal framework for the authorisation and regulation of foreign exchange and deposit brokers operating in the wholesale foreign exchange and deposit market; and
- introduce technical amendments to improve the working of individual provisions of the Ordinance and to streamline the appeal and penalty provisions.
The Bills Committee
3. The House Committee decided at its meeting on 7 June 1996 that a Bills Committee should be formed to study the Bill. The Bills Committee held its first meeting on 17 July 1996 and Dr HUANG Chen-ya was elected Chairman of the Bills Committee. The membership list of the Bills Committee is at Appendix 1.
4. The Bills Committee has held eight meetings. Apart from meeting the Administration, the Committee also invited views from local tertiary institutions and other interested parties on the Bill. The Consumer Council, the Visa International and the Hong Kong Foreign Exchange and Deposit Brokers Association were invited to present their views in the course of the Bills Committees deliberations. The Bills Committee also attended a presentation by the Mondex at the Hong Kong Bank Head Office.
Deliberations of the Bills Committee
The need for a formal legal framework for multi-purpose SVCs
5. The Bills Committee noted that the regulatory framework proposed in the Bill will only apply to the issue or the facilitating of the issue of multi-purpose SVCs (MPs) which may be used to pay for a variety of goods and services by third parties. Single-purpose SVCs will not be subject to this regulatory framework. To allow exemption to certain issuers of MPs, having regard to the relationship between the range of goods and services to be provided and the core business of the issuer, the HKMA will be given the power to declare a SVC not to be a MP to cater for cases, such as the Common Stored Value Ticket issued by the Mass Transit Railway Corporation for payment of public transport services.
6. The Bills Committee also noted that whilst Singapore and some countries in Europe are seeking to regulate MPs by legislation, Hong Kong would be one of the forerunners in introducing a legal framework for the regulation of MPs. The United States is currently adopting a "wait-and-see" approach, although provisions exist in its other legislation that can be applied to the issue of MPs for the protection of consumers.
7. The Administration stressed that the development of SVC technology is moving very rapidly and two major schemes have already been developed in Hong Kong, namely the Mondex and the Visa/MasterCard system. As the creation of value to be stored in MPs such as Mondex is akin to the issue of banknote, the existing controls and backing requirements for the issue of banknote should also apply to the creation of electronic money. Besides, the money received by the issuer of MP is similar to a deposit; and the rationale for restricting deposit-taking to authorised institutions should also be applied to the issuer of MP for the protection of the depositors. Considering that MP has now become a new payment system, any default of an issuer may disrupt the stability of the financial system if MPs are widely used. There is also the possibility of fraud and forgery and other illicit activities such as money laundering which lend support to the need to regulate MPs.
8. In response to questions on whether regulating at such an early stage would hinder development of the MP market, the Administration explained that the proposed legislation has already aimed at striking the right balance between the broad public interest of product innovation and convenience to the consumer and the need to maintain the stability of the payment system.
Special Purpose Vehicles
9. In the Administrations proposal, existing licensed banks would be deemed to be approved to issue or facilitate the issue of MPs, but the existing restricted licence banks (RLB) and deposit-taking companies (DTC) could not engage in such business. Special purpose vehicles whose principal business consists of the issue /facilitating the issue of MPs may, however, apply for authorisation as a RLB or DTC for the principal purpose of issuing /facilitating the issue of MPs. The Bills Committee has had a debate as to whether such an arrangement would lead to a monopoly of the market by licensed banks and confusion over the status of the special purpose vehicles registered as RLB or DTC. After deliberations, the Administration has agreed to introduce Committee Stage Amendment (CSA) to Section 5 (3)(a) so that such special purpose vehicles may only apply for authorisation as DTC but not as RLB. As the scope of business of existing DTCs is already very diverse, there will not be any confusion if certain DTCs are involved principally in a new business such as the issue of MPs. The Administration also agreed to adopt the Bills Committees suggestions that applicants should be clearly advised of the scope of the authorised business, and that the authorised status of these vehicles may have to be specified in the public register of authorised institutions.
Coverage of the proposed regulation on SVCs and exemption conditions
Single-purpose SVCs not subject to regulation
10. In the Administrations original proposal, all single-purpose SVCs will not be subject to regulation. In the light of the comments made by the LegCo Panel on Financial Services that the differentiation of SVCs to be subject to regulation should be based on value rather than the types of usage on which a distinctive line can hardly be drawn, the Administration has intended to introduce an amendment (the new Fourteenth Schedule) to the effect that the maximum value that can be stored on a single-purpose SVC must not exceed HK$1,000. However, following deliberations at the Bills Committee, the Administration has come to the view that single-purpose SVCs are in fact similar to pre-payment of goods and services, and have no connection with the traditional banking business. Single-purpose SVCs therefore should not be brought within the ambit of the Banking Ordinance, and that consumer protection concerns should more appropriately be dealt with in the context of pre-payment of goods. The Administration decided that the Fourteenth Schedule would not be introduced and all single-purpose SVCs, irrespective of their value, would be excluded entirely from regulation under the Banking Ordinance.
SVCs declared by HKMA as not being MPs
11. The Bills Committee noted that the proposed legislation will provide power for the HKMA to declare, by notice in the Gazette, that a SVC or a class of such cards is not a MP for the purposes of the Ordinance. To qualify for exemption, the issuer will have to demonstrate its financial soundness and that of the card system. It also has to declare that the card will only be used for a limited range of purposes. The core use of these cards must be related to the business of the issuer, and if the card is to be extended to other ancillary or incidental uses, there must be a business synergy between the core use and the ancillary uses. To limit the risk to card-holders, the exempted card will be subject to a maximum value that can be stored on each card (tentatively limited to HK$1,000). The limit of such stored value will be specified in the statutory guidelines to issuers.
12. The Bills Committee has mixed views on the proposed exemption criteria. While the Bills Committee does not object to the approach, some members expressed reservations that such restrictions would only apply to MP schemes operated by non-bank entities (as licensed banks were already deemed to be approved for the issue or facilitating the issue of MPs). They suggested that a simpler system would be to grant exemption to all such cards below a certain value. The Administration considers, however, that an automatic exemption system based solely on the value of the card would not be in the interest of the card-holders as the risk of bankruptcy exists irrespective of the value of the card. To address members request that such criteria should sensibly be applied to different non-bank entities, the Administration undertakes that HKMA would be asked to hold further discussions with non-bank issuers about the detailed arrangements.
13. The Administration proposed to give HKMA new powers under Section 16 (9) to impose requirements to issuers of MP as conditions for approval. This will cover the administration and management of funds received from card-holders, and separation of funds from other funds maintained by the issuer/facilitator. HKMA will also include in the statutory guidelines other internal control measures and safeguards against forgery and money-laundering. In this respect, members are concerned that licensed banks which are deemed to be approved for the issue of MPs, should not be treated more favourably than non-bank institutions in compliance with the regulatory requirements. This is to ensure a fair competition environment for banks and non-banks. They also suggest that such institutions should be prohibited from unreasonable anti-competition practices, and an appeal provision should be included in the statutory guidelines or the Code of Practice against any such practices. In this connection, the Administration assured the Bills Committee that all entities approved for the issue of MPs will be subject to similar requirements in respect of chip security, card issuance procedures and float management. While the Administration considers it impracticable to overburden the guidelines or the Code of Practice to include anti-competition clauses, it will nevertheless further discuss with the issuers on ways to address this concern.
14. To ensure all potential issuers are aware of the conditions of approval and exemption, the Bills Committee has suggested, and the Administration agreed, that the conditions will be clearly spelt out in the "Guide to applicants for authorization under the Banking Ordinance".
15. The Bills Committee also noted that a new Section 132A will provide for appeals against the decisions of HKMA or the regulatory requirements imposed.
Security of cards and safeguards against counterfeiting
16. Considering that electronic money is invisible, and forgery of chips or injection of false value is difficult to detect, the Bills Committee has expressed concern about the security of the card schemes, in view of the serious consequences on the payment system. The response of the Administration is that elaborated security measures are in place to detect false electronic value. To satisfy HKMA that the card system is secure, the issuer will have to produce a consultancy report on the security of the card scheme. Nevertheless, to address members concern, HKMA will further discuss with the prospective issuers on the security requirements. While some members consider that detailed security specifications should be included in the legislation or the statutory guidelines to ensure compliance by the issuers, the Administration is of the view that it is not practically possible to list out all technical details and some flexibility will be necessary to cater for the fast changing technology.
17. On the impact of cross-border uses of certain MPs, the Bills Committee is concerned that fraudulent uses of cards issued by overseas institutions may also affect the stability of Hong Kongs payment system. The Administration advised that cross-border uses of MPs are yet to be extended to Hong Kong, but HKMA will monitor developments in this area and impose conditions on uses of overseas cards in Hong Kong where appropriate.
18. The Bills Committee noted that counterfeiting of electronic value and fraudulent uses of stored value would fall within the Crimes Ordinance and Theft Ordinance.
Protection of "deposits"
19. The Bills Committee noted that the existing definition of "deposit" in the Banking Ordinance might not cover all cases where money was pre-paid and stored on a card. Members are concerned that there would not be adequate protection to the funds pre-paid by cardholders in the event of bankruptcy of the issuer. The Administration explained that where the value of the card is originated and issued by the bank itself as in the case of Visa/MasterCard system, the stored value issued is similar to deposits and will be accorded priority treatment in the case of the banks liquidation. To remove doubts in this respect, the Administration agreed to introduce a new deeming provision (new Section 2 (15)) so that such stored value will be accorded priority payment in liquidation under Section 265 (1)(b) of the Companies Ordinance, Cap. 32. As regards the Mondex scheme, the Administration has advised that such stored value is akin to banknotes rather than deposits. The HKMA will impose conditions on Mondex that the float must be invested on high quality assets (e.g. Exchange Fund papers) and is adequate for redemption of any unused Mondex value.
20. Given these safeguards and those governing the operation of authorized institutions in the Ordinance, the Administration considers it unnecessary to require funds paid for SVCs to be placed in a separate trust account of the issuer. The Bills Committee noted that the issuer will be required to maintain an identifiable balance sheet for the issue of MPs, and to comply with the capital and liquidity requirements specified in the legislation.
Regulation of money brokers
21. The Bills Committee accepts the Administrations proposal to introduce a legal framework to regulate money brokers which was made in response to the request of the industry which has found self-regulation difficult in the absence of a legal backing for taking disciplinary actions. The Committee considers, however, that the proposed regulation should not restrict entry of new comers as money brokers. Members noted with concern that the Administration had proposed that all money brokers would be required, under the new Section 134B, to take up membership of the money broker association so that all money brokers would be subject to the existing Code of Practice. Some members of the Bills Committee queried the rationale of such an arrangement. In the light of the Committees comments, the Administration has modified its proposal and will introduce a CSA (new section 134 (1)(a)) to the effect that a money broker approved by HKMA need not be a member of the money broker association, while the existing Code of Conduct will continue to apply to money brokers approved by HKMA.
22. Concerning that over-regulation may inhibit the trade, members have suggested that there should not be excessive restrictions on the operation of money brokers. According to the Administration, the proposed approving criteria as set out in the proposed Eleventh Schedule are only general and minimum requirements to ensure the fitness and propriety of the controllers and directors and the prudent operation of business. The capital requirement was to cater for any contingent liability in the case of mistakes made by the money broker and to enable the money broker to continue with his business in case the volume of business drops significantly.
23. The Bills Committee agrees that the definition of money brokers should be revised to cover both voice brokers and electronic brokers including those operating from overseas for clients in Hong Kong. As regards whether derivatives should also be declared as a type of transactions performed by money brokers, the Administration is of the view that as the core business of money brokers will still involve forex and deposit broking, the proposed definition of money brokers can adequately cover business relating to derivatives. The proposed new Part XXA and the related CSAs are agreed by the Committee.
Appeal and penalty provisions
24. The Bills Committee agrees that penalties now listed in different sections of the Ordinance should be consolidated into a schedule (the new Thirteenth Schedule) for easy reference and to facilitate revision. The proposed revision to the level of penalty is also agreed. The Bills Committee also agrees that the appeals provisions should be grouped together in a new Section 132A.
Committee Stage Amendments
25. The Committee Stage Amendments (including the authenticated Chinese version of the Bill) proposed by the Administration are consolidated at Appendix 2(a) and 2(b).
26. The Bills Committee is in support of the Bill and recommends that the Second Reading debate on the Bill should resume at the LegCo sitting on 8 January 1997.
27. Members are invited to support the recommendations of the Bills Committee at paragraph 26 above.
Legislative Council Secretariat
7 December 1996
Bills Committee on Banking (Amendment) Bill 1996
Dr Hon HUANG Chen-ya, MBE (Chairman)
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
Total : 8 members
16 December 1996
Last Updated on 15 December 1998