LegCo Paper No. CB(1) 1174/96-97
(These minutes have been seen by the Administration)
Ref : CB1/PL/FA/1
LegCo Panel on
Minutes of Meeting held on Monday, 27 January 1997, at 8:30 a.m. in Conference Room A of the Legislative Council Building
Members present :
Dr Hon HUANG Chen-ya, MBE (Chairman)Members absent :
Hon Eric LI Ka-cheung, OBE, JP (Deputy Chairman)
Hon David K P LI, OBE, LLD (Cantab), JP
Hon CHIM Pui-chung
Hon James TO Kun-sun
Hon Andrew CHENG Kar-foo
Hon Paul CHENG Ming-fun
Hon Ambrose LAU Hon-chuen, JP
Dr Hon LAW Cheung-kwok
Hon NGAN Kam-chuen
Hon Martin LEE Chu-ming, QC, JPPublic officers attending :
Hon Ronald ARCULLI, OBE, JP
Dr Hon Philip WONG Yu-hong
Hon SIN Chung-kai
Hon Mrs Elizabeth WONG, CBE, ISO, JP
- Items IV to VI
- Mr Rafael S Y HUI, JP
- Secretary for Financial Services
- Items V and VI
- Mr David Carse, OBE, JP
- Deputy Chief Executive (Banking)
Hong Kong Monetary Authority
- Mr Raymond LI
- Executive Director (Banking Policy)
Hong Kong Monetary Authority
Attendance by invitation :
Clerk in attendance:
Staff in attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
- Miss Anita SIT
- Senior Assistant Secretary (1)6
I.Confirmation of minutes of meetings
(LegCo Papers No. CB(1) 735/96-97 and CB(1) 759/96-97)
1. The minutes of the meetings held on 2 and 16 December 1996 were confirmed.
II Information papers issued since last meeting
2. Members noted that the documents entitled "Guide for Directors of Listed Companies" and "Handbook on Disciplinary Proceedings" provided by the Stock Exchange of Hong Kong had been issued under LegCo Paper No. CB(1) 742/96-97.
III Items for discussion for the next meeting scheduled for 3 March 1997
3. The Chairman informed members that the Administration had suggested that the following items be discussed at the next regular meeting scheduled for 3 March 1997 -
- Supervision of stock brokers; and
- The 1997-98 budget for the Securities and Futures Commission
He asked members to notify the Clerk of any other items they wished to discuss.
4. Members also agreed that a special meeting would be held on 24 February 1997 to discusss the policy aspect of the Insurance Companies (Amendment) Bill 1997.
IV Consultation paper on Management, Supervision and Internal Control Guidelines for Persons Registered with or Licensed by the Securities and Futures Commission
(LegCo Paper No. CB(1) 741/96-97)
5. Mr David J White briefed members on the background and the main aspects of the consultation paper. He remarked that over the past few years, quite a number of incidents in Hong Kong and overseas markets involving fraud and misfeasance of financial intermediaries had their root cause in internal control problems. The proposed guidelines sought to provide guidance to registered persons and licensed traders on internal controls.
6. On the progress of the consultation exercise, Mr White informed members that since the consulation paper was issued in November 1996, Securities and Futures Commission (SFC) had conducted a number of seminars for members of the Hong Kong Futures Exchange and the Stock Exchange of Hong Kong and for persons of related professions including lawyers, accountants and investment fund advisers. The two exchanges had expressed general support to the proposed guidelines, and were taking actions to incorporate the guidelines into their own rules.
7. Dr LAW Cheung-kwok enquired about internal control measures which were being proposed in view of the number of incidents involving fraud and misfeasance committed by proprietors of financial intermediaries in recent years. Mr White replied that this area was not specifically dealt with by the proposed guidelines which were intended to target fraud and misfeasance at non-proprietorship levels. The regulatory bodies, namely SFC and the two exchanges, had to supervise firm proprietors by ad hoc and regular inspections. However, SFC considered that there should be a legal avenue for persons within and associated with the organizations to report fraud direct to the regulatory authorities.
8. The Chairman pointed out that the proposed guidelines were concerned with principles and had yet to be translated into operational procedures for implementation in individual organisations. In this connection, he enquired if SFC would provide assistance to individual organisations in drawing up operational procedures. Mrs Irene TANG and Mr Thomas PANG advised that in the Appendix to the consultation paper, SFC had suggested some control techniques and procedures. In addition, SFC had started discussions with the two exchanges and the Investment Funds Association on provision of more detailed guidelines or procedures for their respective members. Where possible, SFC was ready to provide advice and assistance in the implementation of the guidelines for individual licensed persons and registered traders upon request.
9. As to whether there would be any sanction for non-compliance with the guidelines on internal controls, Mr White remarked that the guidelines were not intended to have the force of law. However, failure to substantially follow the guidelines would reflect adversely on the fitness and properness of the registered persons or licensed traders to continue to be registered or licensed. In practical terms, if a trader was found not to have taken reasonable steps to improve internal controls after SFC and/or the concerned exchange had given relevant advice, SFC would take appropriate enforcement actions. As for cases in which improper or inadequate internal controls were identified but damages had not been caused to other parties, Mr White advised that SFC had taken action on a number of this type of cases both as a result of problems made known to SFC (40%) and SFCs inspection process (60%). In 1996, SFC had taken action 38 times and these ranged from external inspection of organizations to revocation or suspension of licences.
10. In reply to the Chairmans enquiry on how the guidelines dealt with the problem of "fund-running", Mrs TANG advised that it was suggested in the consultation paper that there should be physical and functional separation of dealers handling client funds from those handling firm proprietory or staff accounts, so as to avoid apparent and potential conflicts of interests. In addition, staff handling price sensitive information should work independently and separately from staff engaged in securities dealings. Furthermore, the organsiation should maintain an audit trail and execute clients dealings as a priority over the dealings for proprietory and staff accounts.
11. The Chairman concluded that the Panel was in support of the proposed guidelines in principle.
V The regulation of the banking services made available on the Internet
(LegCo Paper No. CB(1) 762/96-97)
12. In introducing the subject, Mr David Carse remarked that internet banking was just one of the means by which banks could access their customers and communicate with them. Even with the existence of "virtual banks" - a bank that existed solely on the Internet and which already existed in the United States, the basic nature of banks was not altered from a prudential point of view. The main regulatory issues in relation to Internet banking were security and liability for unauthorised transactions. In fact, these problems were not unique to Internet banking but Internet banking presented the problems in a different way which banks would need to deal with differently. Operating on the Internet, banks located abroad might try to solicit customers in Hong Kong and this would give rise to the question of whether banks on the web sites should be subject to provisions of the Banking Ordinance. Hong Kong Monetary Authority (HKMA) was also concerned about cross-border issues and would maintain a close watch over the development and related legal issues, and discuss with individual authorized institutes in Hong Kong their plans for Internet banking. HKMA was also examining the initiative of setting up an "intranet" for the local banking system to facilitate communication among banks and HKMA in electronic form.
13. On the concern that credit card data might be stolen by third parties en- route in making payments over the Internet, Mr Carse said that this was technically possible. He pointed out that credit card data might also be intercepted by third parties on many other occasions such as telephone bookings. Hence, no credit card transaction was totally secure. To increase the level of security over the Internet, protective measures such as encryption and "fire walls" which protected internal networks from outside penetration had been developed in the United States. The encryption techniques were not yet commercially available at present on the standard "browser" sofeware as there was restriction on the export and commercializaion of these techniques, which aimed to prevent this advanced technology from being used by unscrupulous people to disguise information transmitted electronically.
14. On the issue of liability for unauthorised credit card payments made through the Internet, Mr Carse considered the problem not categorically different from unauthorised credit card payments in other contexts, which might result in card details being copied and signatures forged. Banks could hardly claim that the card holder was negligent in using the card for payments through the Internet as it was proper for credit cards to be so used. Members enquired about the details of the nil risk guarantee promised by a bank in UK in respect of its proposed home banking scheme which used the internet. Mr Carse explained that the bank would reimburse all funds removed from a customers account without the customers authorisation, if the removal of funds were due to faults or crimes not prevented by the security system of the bank. However, the guarantee did not cover those errors that were committed by customers, including negligent handling or sharing of user identity numbers or passwords, leading to unauthorised access to accounts or unreported thefts of identity numbers or passwords. If and when Internet banking started in Hong Kong, HKMA would probably adopt the same approach in dealing with unauthorised payments through the Internet in the context of the Code of Banking Practice.
15. As to whether and how Internet service providers should be held liable for unauthorised payments through the Internet, Mr Carse opined that Internet service providers only played a passive role in the process; they only provided the service through which customers could log onto the Internet. Hence Internet service providers should not be held liable for unauthorised payments through the Internet under normal circumstances. Furthermore, he also remarked that as HKMA did not have the power to adjudicate or to arbitrate between banks and their customers over disputes on the liability for unauthorised transactions, these disputes might eventually end up in court. He said however that in any case, the onus should be on the bank to prove that the customer was negligent.
16. It was pointed out in the information paper that it was technically possible for banks situated abroad or "virtual banks" to advertise or solicit deposits from Hong Kong internet users through the Internet, and this gave rise to legal issues of whether banks web page advertisements should be subject to the provisions of the Banking Ordinance. Mr NGAN Kam-chuen expressed concern that this could be a legal loophole whereby unauthorised banks could solicit deposits from Hong Kong and not be subject to HKMAs regulation. Mr Carse acknowledged that this was a problematic area. A web page advertisement was different from a normal newspaper or TV advertisement in that it was an Internet browser who took the initiative to access the web pages, and it was therefore difficult to determine if a web site advertisement could be construed as a bank soliciting deposits from customers. Furthermore, if a bank was located outside Hong Kong in an unregulated jurisdiction, it would be difficult for HKMA to take any action against the bank.
17. On whether Internet banking would be a means susceptable to money-laundering, Mr Carse advised that banks opening an account through the Internet needed to take steps to verify and authenticate the data and message provided through the Internet, and should apply the same stringent standards as those used in opening accounts for people based overseas. The Chairman requested HKMA to monitor the situation especially when large amounts of "hot money" were poured into a bank licensed in Hong Kong through the Internet and to take prompt action if any money-laundering activity was identified.
18. On the idea of establishing a study group under HKMA to examine internet banking issues and their impact on banking business, data security, electronic payments and banking supervision, Mr Carse advised that a study group would be set up in the near future.
VI Code of Banking Practice
19. Mr Carse briefed members on the background to the draft Code of Banking Practice (the Code). He remarked that HKMA took the lead in drafting the Code to contribute to the stability of the banking system by striking a balance between protection for bank customers and efficiency of banks. The Code had been distributed to the banking industry, the Consumer Council, the Personal Data Privacy Commission and the Equal Opportunity Commission for consultation. He also advised that sections on "Personal referees" and "Recovery of loans and advances" had been issued to banks in the form of guidelines.
|20. On the situation whereby the terms and conditions of a contract between a bank and its customer were found not compatible with the Code, Mr Carse advised that the Code was not a legal document but in case of dispute, the court would probably refer to the Code in considering the reasonableness of the contractual terms. As to actions which would be taken by HKMA for non-compliance with the Code, Mr Carse said that upon agreement by the Hong Kong Association of Banks and the Deposit Taking Companies Association and implementation of the Code, HKMA would expect authorised institutions to comply with it.||HKMA|
|21. On the requirement to quote the annualised percentage rate of interest (APR) for all banks credit services, Dr LAW Cheung-kwok pointed out that the Consumer Credit Act of UK also required banks to take into account the related fees and charges in calculating APR, and enquired whether HKMA would consider revising the provision in the Code in this direction. He also observed that for bank loans other than residential mortgages, the schedule of instalments payable by customers often did not show the respective proportions of loan interest and loan principal of each payment. In response, Mr Carse agreed to further examine whether fees and charges should be included in calculating APR. He however remarked that the Code was intended to set minimum standards that banks should observe in dealing with customers. The differential standards of banking services above these minimum standards were a matter of market competition. Hence, it was set out in the draft Code the basic principle that wherever relevant, APR should be quoted with details of relevant fees and charges. It was recognised that there were different methodologies for calculating the APR for different types of products. HKMA had recommended to banks that for instalment loans with a regular stream of repayments, the formula set out in the guidelines of The Hong Kong Association of Banks dated 12 May 1995 should be adopted in calculating APR.||Admin
|22. The Chairman referred to the provisions on residential mortgage lending and enquired whether the provisions implied that banks could restrict the choice of their customers to the banks approved lists of solicitors and insurance companies. Mr Carse replied that it was specified in the Code that banks should make known to customers whether they had the right to employ separate legal representation for themselves. He remarked that residential mortgages had become a very competitive business and making use of an approved list of solicitors and insurers for customers was one way to reduce costs for both banks and customers. Customers who chose to appoint their own solicitors might have to incur higher costs.||HKMA|
23. The Chairman said that it was unfair for banks to specify in mortgage contracts that the bank had the right to require the customer to repay all the mortgage loan any time during the amortization period. Mr Carse responded that he did not think this would be a problem as it would not be to the advantage of banks to recall mortgage loans under normal circumstances unless the mortgagee defaulted. The Chairman opined that it should be specified in the Code that banks could recall a mortgage loan only if the mortgagee concerned defaulted, and this should be stated clearly in mortgage contracts.
24. With regard to the issue of credit cards to full-time students under the age of 25 who had no proof of independent financial means, the Code specified that the card issuer should require the applicants to provide particulars of their parents and give consent for the card issuer to pass information to them. Mr Carse elaborated that there was no implication in the provisions that by informing parents of the credit cards holders, the parents were to guarantee the obligations of their children.
25. As regards advertisements by banks, Mr Carse advised that it was set out in the draft Code that all advertising and promotional materials should be fair and reasonable, comply with all relevant legislation, codes and rules, and should not contain misleading information. On whether HKMA would take the initiative to scrutinise banks advertisements of new products or services which emphasisd monetary benefits, Mr Carse said that HKMA would check with the bank concerned over any obviously misleading message. However, some scope of individual judgement on advertisements should always be allowed.
26. Mr CHENG Kar-foo said that he did not agree with the principle implied in the relevant provisions of the Code that banks could employ debt collecting agencies (DCA) provided that the customer concerned had expressed his consent to this way of debt recovery by signing a credit contract containing such conditions. He opined that given that DCA were not regulated under a licensing system, banks and credit card issuers should be prohibited from employing DCA for debt recovery.
27. In response, Mr Carse said that the basic principle that a person should be obliged to repay his debts should be upheld. It was also in the interests of the general depositors of banks that banks did not have to incur high level of bad debts. Banks could derive benefits from specialisation and thus reduce costs for debt recovery by employing institutions or agents that specialised in recovering debts. If banks were prohibited from employing DCA, there would likely be a rise in banks bad debts and additional costs would be incurred by banks in setting up their own debt recovery units, which would somehow be passed to other users of banking services eventually. On the other hand, HKMA fully agreed that DCA should not be allowed to resort to violence or intimidation against any person in their debt recovery actions. It was to address this concern that detailed guidelines on the use of DCA were included in the Code, and in addition, a hotline had been set up in April 1996 to handle complaints about activities of DCA. Mr Cheng Kar-foo opined that from the communitys point of view, the problems created by DCA much outweighed the benefits and that one main reason for defaulted credits was banks lax manner in offering credits and issuing credit cards.
28. Mr James TO commented that rather than encouraging banks to employ DCA, the Administration should focus its efforts on strengthening of the legal framework for recovery of debts of all sorts. Banks lax lending manner was encouraged by the prospect of their being able to make defaulted customers repay debts through employing DCA. The means employed by DCA were not necessarily unlawful, but in most cases would cause nuisance not only to the debtors concerned but to innocent people who might be neighbours of the debtors or associated with the debtors in some ways. Nuisance caused to the innocent was a social cost not paid for by the banks. He urged the Administration to take heed of the social effects caused by DCA, and not just care about the stability of the banking system.
29. In response to the above comments, Mr Carse said that having regard to the high costs of civil litigation, pure reliance on the civil court for debt recovery was rather impractical. He agreed that banks should try to prevent unpaid debts in the first place, but considered that banks in Hong Kong were generally operating responsibly in terms of credit standards used. To put the issue into perspective, the scale of the problems associated with DCA was rather small. The rate of credit card bad debts in Hong Kong was about 2.3%, which was much lower than the rate of 5.5% in US. With 4.5 million card holders in Hong Kong, only 289 complaints against DCA had been received through the hotline from April 1996 to January this year. Of those 289 cases, 71 were related to intimidation, two to defamation, 205 to nuisances and 11 to violence. In fact, the proportion of cases involving intimidation and voilence had dropped off significantly over the months.
30. Regarding the Administrations stance on the issue, the Secretary for Financial Services said that the basic principle for one to be held responsible for the money owed to another party must be upheld. A person should also be held responsible for the obligations enshrined in the credit contract entered into with a bank. As regards the means used by DCA, the Administration and HKMA had given serious attention to the issue. Intimidation and violence were unlawful and should be handled by the Police, and not by the financial regulatory bodies. From the perspective of a regulator of the financial services sector, stability of the financial system was the main consideration.
|31. After discussion, some members requested the Administration to provide information in recent years on the following:
- the number of cases where DCA had been employed, the types of credits concerned and the number of persons contacted by DCA in the debt collection process;
- the amount of debts assigned to DCA for recovery;
- the proportion of assigned debts recovered by DCA; and
- deficiencies of the existing civil litigation procedures in respect of debt recovery, and suggested improvements.
|32. Mr Carse agreed to provide relevant information as far as possible but remarked that some statistics might not be available.||HKMA|
33. Mr LAU hon-chuen requested and HKMA agreed to provide information on the present mode of remuneration offered by banks to DCA, and on whether conditions requiring customers to indemnify banks for the costs and expenses banks incurred in the debt recovery process were usually included in banks credit contracts. He considered that the mode of remuneration to DCA had important bearing on the sort of actions DCA would resort to, and perhaps, some guidelines on the mode of remuneration should be included in the Code.
34. The meeting ended at 10:45 am.
Legislative Council Secretariat
2 April 1997
Last Updated on 18 August 1998