LegCo Paper No. CB(1) 1599/95-96
(These minutes have been seen by
Ref : CB1/PL/FA/1
LegCo Panel on Financial Affairs
Minutes of Meeting/Informal Meeting
held on Monday, 6 May 1996 at 8:30 a.m.
in Conference Room A of the Legislative Council Building
Members Present :
Dr Hon HUANG Chen-ya, MBE (Chairman)
Hon Martin LEE Chu-ming, QC, JP
Hon Ronald ARCULLI, OBE, JP
Hon Paul CHENG Ming-fun
Dr Hon LAW Cheung-kwok
Hon NGAN Kam-chuen
Hon SIN Chung-kai
Members Absent :
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Dr Hon David LI Kwok-po, OBE, LLD (Cantab), JP
Hon CHIM Pui-chung
Hon James TO Kun-sun
Dr Hon Philip WONG Yu-hong
Hon Andrew CHENG Kar-foo
Hon Ambrose LAU Hon-chuen, JP
Hon Mrs Elizabeth WONG CHIEN Chi-lien, CBE, ISO, JP
Public Officers Attending :
- Mr Rafael HUI
- Secretary for Financial Services
- Mr Joseph YAM
- Chief Executive, Hong Kong Monetary Authority
- Mr David Carse
- Deputy Chief Executive (Banking),
Hong Kong Monetary Authority
- Mr Norman CHAN
- Deputy Chief Executive (Monetary) (Acting)
Hong Kong Monetary Authority
- Mr Peter PANG
- Executive Director (Banking Policy),
Hong Kong Monetary Authority
Attendance by Invitation :
- Item IV
- Hong Kong Blind Union
- Mr CHONG Chan-yau
- Miss KO Po-kuen
- Mr LO Yiu-man
- Mr LEUNG Kau
- Mr LEE Cheung-shing
Staff in Attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
- Miss Anita SIT
- Senior Assistant Secretary (1)6
The Chairman invited members to forward items they wished to discuss at the next meeting scheduled for 3 June 1996 to the Panel Clerk.
(LegCo Paper No. CB(1) 1314/95-96)
2. At the invitation of the Chairman, Mr Joseph YAM briefed members on the background and framework of the legislative proposals in the Banking (Amendment) Bill 1996 which was yet to be put to the Executive Council.
3. In response to members' enquiry about the policies of other jurisdictions in respect of stored value cards (SVCs), Mr YAM advised that SVCs were a newly developed payment instrument; many jurisdictions were looking into the need for and the technicalities of regulation, but few had already established their regulatory frameworks in this respect. The majority opinion among central banks was that the issue of multi-purpose stored value cards (MPs) needed to be regulated because it was akin to deposit-taking and could have significant impact on the monetary system. The Federal Reserve of the United States was currently looking into the risk implications of SVCs and the technicalities of regulation. Mr David Carse added that Singapore had already legislated along the lines similar to those proposed by HKMA. Central banks of the United Kingdom (UK) and most other European countries agreed with the principle that only banks and particular types of deposit-taking institutions should be permitted to issue MPs.
4. Members commented that the arguments for the need of a legal framework in respect of SVCs presented by HKMA so far were all in the affirmative. As Hong Kong would be one of the forerunners in introducing such a legal framework, it was important that information on the policies and legal frameworks of other jurisdictions, including those that did not favour regulation should be provided to members for reference. In response, Mr Carse undertook to provide a paper setting out the views and regulatory appoaches of other jurisdictions which were available to HKMA.
5. Members expressed concern that introducing regulation at such an early stage might stifle the development of the SVC market. Since only two MP schemes were known to be under development in the market, there might be an inclination to gear the legal framework to cater for these known schemes only, leaving little scope for future competition in the market.
6. In response to the above comments, Mr Carse pointed out that it was important to put in place the legal framework to avoid a situation of fait accompli and to ensure that the market would be developed in a healthy manner. He stressed that the proposed legal framework only pertained to the setting up of a simple and general authorization regime. As there were at present 185 licensed banks in Hong Kong, there should be sufficient scope for competition. He also advised that HKMA had consulted the banking sector and prospective SVC issuers on the proposed authorization regime and found that there was general acceptance of the proposal. Mr YAM added that HKMA was conscious of the need not to stifle competition. The proposal was to ensure that MPs would be issued in a prudent manner with adequate protection for those who had paid for them.
7. A member said that he was not convinced that only authorized institutions should be allowed to issue MPs. He was concerned that the market might be monopolised by established banks. Mr Carse responded that it was considered appropriate to restrict the issue of general purpose MPs to licensed banks which would not be required to seek specific approval, as MPs were akin to money and were in effect a new electronic payment system. However, it was recognised that there were certain types of MPs that were used for a defined scope of goods and services and the convenience offered by them was much valued by the community. Hence, the proposed framework also catered for the issue of these cards by special purpose vehicles (SPVs) by allowing them to apply for authorisation as a restricted license bank (RLB) or deposit-taking (DTC) company for the principal purpose of being approved to issue/facilitate the issue of MPs.
8. A member enquired if HKMA would consider setting a limit to the total value of SVCs an issuer could issue at any one time and/or introducing a requirement on the issuer to put aside a reserve fund if the total value of SVCs issued exceeded the limit. In reply, Mr Carse said that the proposed legal framework would empower the regulatory authority to impose certain conditions on the issue of MPs, including those which would prescribe the way in which the float' (i.e. money received by the facilitator/issuer in return for the SVCs issued) would be managed. For example, an issuer might be required to set aside the float' from other assets of the issuer and to invest it in credit risk free instruments such as Exchange Fund Bills.
9. On the rationale for not introducing a separate class of authorised institutions and thus a separate regulatory framework for SPVs but to extend the regulatory framework for RLBs or DTCs to these issuers/facilitators, Mr Carse and Mr YAM explained that it was considered appropriate to apply the existing authorisation criteria and regulatory mechanism for RLBs and DTCs to SPVs which would also remove the need to introduce duplicating provisions in the Banking Ordinance to cover SPV card issuers. Coupled with HKMA's power to lay down conditions for the management of the float' by SPVs, the regulatory framework should be adequate to guard against the risks incurred.
10. Members queried the rationale for only regulating MPs, but not single-purpose stored value cards (SPs). Mr Carse replied that there was a spectrum of types of SVCs in terms of the range of goods and services that the SVC might be used to purchase. At one end were SPs issued by a single issuer and was only used for the goods and services provided by that issuer. At the other end were general purpose MPs that could be used to pay for a wide spectrum of goods and services provided by suppliers unconnected with the issuer. The broader the range of goods and services in respect of which a SVC could be used, the more it was like money'. As regards SVCs in between the two ends of the spectrum, HKMA would be empowered under the proposal to decide if a specific approval for the issue of a particular type of SVCs would be needed or an exemption could be granted. HKMA would set out detailed criteria in guidelines against which individual cases would be assessed.
11. Some members were still not convinced that SPs and MPs were categorically different and expressed reservation about the proposal that whether a type of SVCs should be regulated was based on whether the SVCs were SPs or MPs as defined above or as determined by the HKMA. In response, Mr Carse acknowledged that it was difficult to come up with a neat and tidy set of criteria for determining which types of SVCs should be regulated at this stage. If all SVCs were to be regulated, there might be over-regulation and the development of the market would be stifled. Yet, the risks incurred by those SVCs which could be used to pay for a broad range of goods and services provided by a number of suppliers did necessitate regulation. To resolve the problem, the distinctive characteristics of money', defined as a medium of exchange that could be used for payment of transactions generally, were used as the basis in drawing the line between regulation and non-regulation.
12. A member pointed out that even in a straight forward case of SPs, the total value involved could be so significant that the default risk should warrant regulation. For example if a large supermarket corporation which issued SPs defaulted, the amount of loss might be small for individual consumers but would be significant in total. He opined that this might even cause a confidence crisis in the payment system. Mr Carse shared the member's view and advised that HKMA would consider including the value' factor into the definition of SPs so that the statutory exemption for these would only apply below a certain limit for the amount that could be stored on the card. HKMA might be empowered to amend the amount from time to time by notice in the gazette. He undertook to brief ExCo on this suggestion and to consider an amendment to the Bill to be introduced at the Committee Stage.
13. The Administration and HKMA took note of a member's concern that unlike travellers' cheques, it was technically possible to monitor the stored value on SVCs not yet spent.
14. On monitoring the impact of SVCs on the overall money supply of the economy, Mr YAM said that a provision might be included to require issuers to report to the HKMA the number and value of SVCs they planned to issue or had issued.
15. In the absence of a quorum at 9:20 am, members agreed that the ensuing meeting should continue as an informal discussion. The Chairman reminded members that they would not be protected by the Powers and Privileges Ordinance.
(Mortgage Corporation Proposal published in April 1996 and distributed directly to members by HKMA. File reference : (20) in CB1/PL/FA(10).)
16. Some Members expressed reservation about the need for setting up a mortgage corporation (MC) to meet the claimed shortfall of residential mortgage funds in the foreseeable future. They were also concerned about the impact of increased availability of mortgage funds on residential property prices and whether there would be specific legislation governing the operation of the MC. Furthermore, there might be a role conflict for HKMA to be the supervisory authority as well as a major shareholder of the MC.
17. On the methodology used for working out the projected demand for residential mortgage funds, Mr YAM advised that the projected potential demand was worked out based on the past trend of demand for residential mortgage funds and the projected supply of housing units in the public and the private sectors. It was found that there would be a shortfall of residential mortgage funds to meet the potential demand.
18. With respect to the argument that the market would adjust itself over any short-term disequilibrium without the need for a MC, Mr YAM explained that one form of adjustment was the entry of more banking institutions to provide the required mortgage funds. There was however a structural constraint in relying solely on the banking institutions to provide long-term mortgage funds, as their funding sources were mainly of a short-term nature. Another likely form of adjustment was a rise in residential mortgage interest rates. A significant rise in the mortgage rate would adversely affect the affordability of housing units to potential home buyers and was therefore not conducive to the promotion of home ownership.
19. In response to members' enquiry, Mr YAM confirmed that the primary objective of the proposal was not so much to increase the availability of mortgage funds for residential property investors as to maintain the stability of the banking system. He further explained that HKMA and the Administration foresaw a big shortage of mortgage funds which would have to be met somehow. If the shortage was to be met by the existing banking system, the system would have to incur risks beyond a prudent level. Indeed, the present exposure of banks to the property market was already on the high side. Fifteen years ago, mortgage loans represented only about 8% of GDP and now it was 31%. The MC would help maintain a more balanced exposure of banks to the property market. Through the issue of debt securities, the MC would also facilitate the development of the debt securities market in Hong Kong. One of the main reasons for financing the MC from the Exchange Fund was that the MC would help achieve the three major objectives of the Exchange Fund, namely, maintaining the stability of the banking system, promoting monetary stability and facilitating the development of financial markets.
20. Regarding the impact of the greater availability of mortgage funds with the set up of the MC on property prices, Mr YAM said that the impact, if any, would be an indirect one. Mr Rafael HUI advised that the Administration together with the HKMA had examined this issue before launching the proposal for the MC. The conclusion was that it was unlikely that property prices would shoot up in the manner witnessed in 1991 and 1992 because of the greater availability of mortgage funds. The establishment of a MC would satisfy the need to meet the shortfall of mortgage funds without causing instability to the banking system and would enable the community to attain home ownership without having to bear a high price for the mortgage funds they needed.
21. On the allegation that HKMA was not consistent in that while it imposed a 70% mortgage ceiling on banks, it also proposed to set up a MC to increase the availability of mortgage funds, Mr Carse clarified that the 70% mortgage ceiling was not meant to suppress the property market, but to serve as a prudent measure to limit banks' exposure to the property market. The measure was introduced in November 1991, when the concern about speculation in the property market had not yet arisen.
22. Members were concerned that as the MC was likely to purchase only high quality mortgages loans from banks, banks would be left with mortgage loans of lower quality, hence increasing the risk to be borne by banks. In response, Mr YAM stressed that the MC would not have any statutory power to compel banks to sell particular kinds of mortgages to the MC. It would be likely that banks would provide loans according to or with reference to the criteria used by the MC for selection of mortgages.
23. With regard to the basis on which to determine the interest rates of debt securities issued by the MC, Mr YAM explained that these rates would be determined by the market itself. He further advised that debt securities issued by the MC would mainly be offered to the market by open tenders. While debt securities would be issued with a fixed face value, interest rate and maturity date, they would be sold at a premium or at a discount depending on the market's evaluation of their value. The market interest rates for these securities would be reflected in the transaction prices.
24. Regarding the MC's management of prepayment risk, i.e. the risk associated with borrowers prepaying the existing loans or re-financing their mortgages, Mr YAM said that one popular option to handle this risk was to issue callable bonds, which gave the issuer the option to redeem the bonds before the maturity date. Further details on prepayment risk were included in paragraph 6.10 of the proposal paper.
25. On the amount of capital base for the MC, Mr YAM said that the proposed HK$1 billion was considered appropriate as a prudent start for the corporation. During the start-up period, mortgage funds to be provided by the MC would only form a small proportion of the total mortgage loans outstanding in the market. Further injection of capital from the Exchange Fund or through public listing of the corporation would be considered after the MC had operated for some time.
26. As regards HKMA's role in respect of the MC, Mr YAM said that the MC would not be managed by the HKMA but by a Board of Directors to be appointed by the Governor or the future Chief Executive. HKMA would only be a shareholder and it was unlikely that a majority of the directorship would be occupied by HKMA. He did not foresee any role conflicts for HKMA.
27. In respect of the need for legislation in governing the operation of the MC, Mr YAM stated that it was not appropriate to provide the MC with statutory powers over banks or other counter parties. The MC should deal with banks and other counter parties on a commercial and voluntary basis. Furthermore, the MC would have to comply with the Companies Ordinance as other commercial companies. Its mode of operation would be laid down in its Memorandum and Articles of Association (M&A). Mr HUI added that the MC would operate as a commercial company and the Administration did not consider it necessary to introduce specific legislation to govern its operation. If the Legislative Council and the public were interested to know the M&A of the MC, the Administration and the HKMA would be happy to provide the details in due course.
28. Some members were still not convinced that specific legislation governing the operation of the MC was not needed. A member opined that if the MC was financed entirely by the Exchange Fund but was not wholly managed by the HKMA, then a separate legislation would be necessary on account that the Exchange Fund was public money and there was no existing legal framework that could be properly applied to an entity like the MC. The M&A of a company were not statutory and thus were not adequate for the protection of public interest.
29. At members' request, Mr YAM undertook to provide information on the experience of overseas mortgage corporations. If any information on these mortgage corporations was provided to the HKMA in confidence, a summary instead of the details would be provided.
(LegCo Paper No. PL 1169 and Annex C to PL 1161/95-96)
30. At the invitation of the Chairman, Mr CHONG Chan-yau made the following points regarding the problems faced by blind people in the community in their use of banking services:
- Blind people were often denied some banking services or had to satisfy additional conditions in order to obtain services. Services which banks often refused to provide for the blind included personal current accounts, credit cards and telephone banking services. For services like savings accounts, blind people had to satisfy additional criteria/conditions such as the presence of another person to serve as a witness and the signing of a letter of indemnity in opening an account. The Union was of the view that the above problems were more attributable to a general misunderstanding of blind people's ability to manage their bank accounts than to conscious discrimination against the blind.
- Banks might have been too wary about the problem of blind people raising the defence of "non est factum", which was a common law remedy by virtue of which an illiterate person or (by close analogy) a blind person might argue that the document signed did not bind him.
- Over the past few years, the Union had had much discussion with the Association of Banks and as a result, the Association had issued a set of guidelines to its members urging them to end the discriminatory practices and where feasible, to adopt positive measures to facilitate the blind in using banks' services. The Association had spent much effort in this regard. The concrete measure of setting up a complaint hotline for the blind was particularly appreciated as most of the complaints lodged through the hotline had been effectively dealt with.
- There was however still room for improvement. The number of complaints was not reducing and the types of services concerned were increasing. The Union considered that the crux of the problem did not lie with the lack of legislative measures (with the enactment of the Disability Discrimination Ordinance) and administrative guidelines within the banking sector. It might be that the policy and guidelines adopted by banks' senior management had not been effectively disseminated to the branches' management and the frontline staff. The Union hoped that in future, banks would provide clear guidelines on servicing blind customers for all their staff and include a session on these guidelines in their staff training programmes.
- The Union would also like to urge the banking sector to take more positive steps to facilitate blind people in using banks' services. Reference might be made to banks in some other developed countries where special equipment and aids were provided for the blind. In addition, airlines also set a good example in their provision of services for the blind and people who required special assistance.
31. Mr LEUNG Kau said that it was difficult to find a person to serve as a witness for a blind person in opening an account, as most people did not want to take up the legal responsibilities. He expressed dissatisfaction that the guidelines agreed by the Association of Banks were often not complied with by frontline staff, sometimes including branch managers. Recently, a bank cancelled his telephone banking account because the bank was concerned that a blind person might not be able to send their instructions accurately through the telephone key pad. Ironically, a traditional job for the blind was telephone operator.
32. In reply to a member, Mr CHONG said that blacklisting of banks by the Union would not have deterrent effect on banks because blind people only formed an insignificant proportion of banks' customers and also were seldom big customers.
33. Mr CHONG undertook to provide a note on the complaints against banks' discriminatory practices received by the Union from its members for reference by the Panel and HKMA.
34. Mr YAM said that as pointed out by Mr CHONG, the problem was not so much the lack of guidelines for banks as the lack of understanding and non-compliance by frontline staff. He undertook to convey the views of the Union to the Association of Banks and to discuss with the Association with a view to working out improvement measures, in particular the need to improve staff training in this respect. He added that as HKMA was now drafting a Code of Banking Practice, a function empowered under the Banking Ordinance, HKMA would consider including provisions regarding the provision of services for the blind and would discuss the details with the Union in due course.
35. On the channels for lodging complaints against any discriminatory practices of banks, Mr YAM said that such complaints could be made to the HKMA. Another appropriate channel would be the Equal Opportunities Commission which would soon come into operation.
36. The meeting ended at 10:45 am.
11 June 1996
Last Updated on 18 Aug, 1998