Provisional Legislative Council
PLC Paper No. CB(1)987
(These minutes have been
seen by the Administration.)
Ref : CB1/PL/FA/1
Panel on Financial Affairs
Minutes of Meeting held on Monday, 5 January 1998, at 4:30 pm in Conference Room B of the Legislative Council Building
Members present :
Hon Paul CHENG Ming-fun, JP (Chairman)
Hon NGAN Kam-chuen (Deputy Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Dr Hon David LI Kwok-po, JP
Hon Henry WU
Hon CHAN Choi-hi
Hon CHIM Pui-chung
Dr Hon LAW Cheung-kwok
Members absent :
Hon Ronald ARCULLI, JP
Dr Hon Philip WONG Yu-hong
Public officers attending :
- For Agenda item IV
- Mrs Rebecca LAI, JP
- Deputy Secretary for Financial Services
- Mr Bryan P K CHAN
- Principal Assistant Secretary for Financial Services
- For Agenda item V
- Mr Martin Glass
- Deputy Secretary for the Treasury
- Mrs Agnes Sin
- Deputy Commissioner of Inland Revenue
- Mr Alan Siu
- Principal Assistant Secretary for the Treasury
Clerk in attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
Staff in attendance :
- Mr Andy LAU
- Senior Assistant Secretary (1)6
I.Internal discussion on the recent financial turmoil
Members noted the letter dated 19 December 1997 from Secretary for Financial Services on further discussion of the recent financial turmoil, which had been circulated under PLC Paper No. CB(1) 703 on 24 December 1997. Upon suggestion by the Chairman, members agreed that the issue be discussed in a closed session.
II.Information papers issued since last meeting
Regional Monitor - Issue No. 8, November 1997 issued by the Stock Exchange of Hong Kong
Consultation paper on Stock Lending and Borrowing System issued by the Hong Kong Securities Clearing Company Limited)
3.Members noted the information papers issued since the last meeting.
III.Date and items for discussion at the next meeting
4.The Chairman advised that as members continued to be very concerned about the financial turbulence in the region, the Panel decided to invite the Administration to brief members on the latest developments in the region's financial markets and the possible impact they might have on Hong Kong at a special meeting on 13 January 1998 at 4:30 pm.
5.Members agreed that the next regular meeting would be held on 10 February 1998, at 4:30 pm.
(Post meeting note : With the concurrence of the Chairman, the next meeting had been rescheduled for 12 February 1998 immediately after a joint meeting of the Financial Affairs and Transport Panels at 4:30 pm to discuss the equity injection into Kowloon-Canton Railway Corporation for implementation of West Rail.)
6.The Stock Exchange of Hong Kong's written response to Mr Tony FUNG's open letter on ways to improve the operations of the Exchange was tabled at the meeting for members reference. Members agreed that they would determine at a later stage as to whether it was necessary to follow up the subject at a future meeting.
7.Members agreed to discuss the proposed electronic trading for the Hong Kong Futures Exchange at a future meeting.
IV.Monitoring of the local London gold market
(CB(1)716(01) - information paper prepared by the Administration)
8.Mr Henry WU declared interest as the Honorary Permanent President of the Chinese Gold and Silver Exchange Society ("the Society").
9.At the invitation of the Chairman, the Deputy Secretary for Financial Services (DS for FS) briefed members on the salient points of the information paper. In her introduction, the DS for FS highlighted that the Loco London gold market was a significant market with a daily estimated turnover of US$190 million, or seven times of the daily turnover of the Society. Hone Kong was also one of the global markets for London gold like New York and London as well as serving as the trading centre for Asia. Like other London gold trading centres, the Hong Kong market was basically a free market and trading was essentially conducted at the wholesale level among sophisticated institutional traders. While the government was concerned about alleged fraudulent activities in the disguise of Loco London gold trading and was sympathetic with victims of such cases, it was not that considered justified to regulate genuine London gold trading. The appropriate solution laid with investor education.
10.In response to a member's comment that members of the public were generally not knowledgeable about the operation of Loco London gold market, DS for FS shared members view that the market was not easily comprehensible to the average investors as it was essentially a professional market at the wholesale level. She undertook to further improve the current publication materials and investor education programme to provide more information on the background and operation of the market.
11.Members expressed grave concern about the problem of fraudulence and deception activities in relation to trading on Loco London Gold. Given that Hong Kong was a major financial centre, they opined that a proper regulatory framework should be put in place to protect the interests of investors. Some members added that since night trading was mainly conducted through unlicensed companies which were not members of the Society, it was easily susceptible to fraudulent activities. They urged the Administration to confine trading to members of the Society, who were subject to a minimum capital requirement of $1 million. This requirement would provide some form of protection to investors.
12.In reply, DS for FS said that the majority of complaints received in relation to trading on Loco London Gold did not actually pertain to genuine bullion trading, but rather was associated with deception of job seekers by companies which claimed to be investment companies dealing in London gold. It was therefore inappropriate to seek to regulate a bona fide trade, in this case the trading of London gold, on the ground that fraudulence cases occurred in the guise of such trade. She added that it would not be appropriate to confine the market on Loco London Gold to members of the Society as there were also other bona fide traders in the market including banks and investment companies. As regards night trading of London gold, the Administration had not received complaints on the activity but undertook to have a read-out on the issue from the Society.
13.A member urged the Administration to liaise with the Society to see how its regulatory functions could be further improved. In so doing, adequate resources and statutory authority should be granted to them to facilitate enforcement. DS for FS said that the Administration had maintained close contact with the Society on matters relating to the further promotion of the Hong Kong gold market in general and the enhancement of the operation of the Society in particular and would continue to do so on matters of interest of the Society.
14.Mr Henry WU remarked that the Society would exercise stringent control over its members and would look into potential fraudulent activities brought to its attention. The code of practice for its members was drafted with reference to those of the two Exchanges. He further advised that members of the Society would not take part in night trading and notices had been posted in newspapers in past years to inform the general public accordingly. Whilst the current problem did not relate to genuine trading, job seekers should be reminded of the need to obtain a full understanding of the rights and obligations of signing investment contracts and be warned against being greedy.
15.Members questioned whether the trading in relation to the 37 complaints referred to in the paper was conducted through the Society and whether the introduction of mandatory trading through the Society would minimize fraudulent activities. DS for FS said that she was not aware of any members of the Society that were directly involved in the complaints. She also reiterated that in cases where the company deliberately acted to defraud investors, licensing would not solve the problem as the company might also hold itself out as a properly registered trader. Given that the Society had been operating effectively on a self-regulatory basis for over 80 years, and in the absence of sufficient justification for a change in current market structure, the Administration believed that the best solution to the problem laid on the effective enforcement against fraud and deception activities and on public education.
16.Members expressed concern that of the 37 complaint cases, only one conviction had been made by the court. They enquired about the reasons for the low conviction rate. In response, DS for FS said that like other cases involving fraudulent activities, the main difficulties in prosecution were in the finding of sufficient evidence to prove the intent of deception and fraud.
17.In response to members further question, DS for FS informed the meeting that approximately $56 million and 270 alleged victims were involved in the 37 complaint cases in the past two years.
18.As the Loco London Gold market was a highly sophisticated market with a group of seasoned and specialized traders, a member did not agree that public education alone would be effective in minimizing fraudulent activities. He opined that there should be a licensing system so that members of the public could rely on the monitoring mechanism whilst making investment.
19.DS for FS considered that the investor programme had so far been effective. The Administration would take steps to further enhance the programme including a more proactive approach to disseminate the information leaflets on Loco London gold related fraudulent activities to the new arrivals through relevant voluntary organisations, Immigration Department and District Offices.
20.A member pointed out that the public should be better informed of the characteristics of complaint cases which involved substantial values. As to whether there was any commonality of the 37 complaint cases, DS for FS advised that on the basis of the Police's information, the majority cases were related to job traps, in which job applicants responding to recruitment advertisements by companies which claimed to be investment companies dealing in London gold were lured into investing in London gold or silver. Some of them were persuaded to sign contracts authorizing the companies full right to buy or sell on their behalf. In many cases, the complainants did not fully understand the nature of their investment activities and, within very short period of time, were told by the companies that they had lost their money or even become indebted to the companies.
21.Noting that if complainants were persuaded to sign contracts authorizing the companies full right to buy or sell on their behalf, it would be difficult for the enforcement authority to proceed further, some members suggested that the existing legislation should be reviewed in order to plug the loophole. DS for FS replied that the Law Reform Commission had been reviewing the Theft Ordinance with a view to further strengthening the fraud-related provisions.
22.As to whether the enforcement authority could take a proactive approach to investigate into local gold traders and investment companies, for example, by deploying police officers to respond to recruitment advertisements by companies which claimed to be investment companies dealing in London gold, DS for FS said that she would discuss the suggestion with the Police and the Security Bureau.
|23.After deliberation, members maintained the view that a proper regulatory framework should be put in place to protect the interests of investors. They also requested the Administration to provide further information on the following:
- the details of the 37 complaint cases including the values involved and why enforcement actions could not be taken against the companies concerned;
- in relation to (a), whether any of the complaint cases involved members of the Society;
- the latest position of the study of the Law Reform Commission on fraud-related provisions and whether the Administration intended to amend the legislation to facilitate prosecution; and
- the progress of discussion between the Administration and the Society on regulation of local gold traders.
24.Members agreed that upon receipt of the information, they would consider whether it was necessary to discuss the subject further.
V.Interest on tax reserve certificates
Information paper prepared by the Administration
Extract from the minutes of the Finance Committee meeting on 3 October 1997 on "Interest on tax reserve certificates"
Information paper for the Finance Committee meeting on 3 October 1997 on "Interest on tax reserve certificates")
25. The Chairman informed members that this item was referred by the Finance Committee to the Panel for discussion.
26.Mr NGAN Kam-chuen declared interest as a practitioner in the banking sector.
27.At the invitation of the Chairman, the Deputy Secretary for the Treasury (DS for Tsy) briefed members on the salient points of the information paper.
28.A member pointed out that at the Finance Committee meeting on 3 October 1997, the Administration proposed to seek a supplementary provision of $30.1 million for payment of interest on tax reserve certificates (TRCs). The amount requested was even higher than the originally approved provision of $28.1 million. This gave rise to the concern about the substantial amount of tax paid by taxpayers which should not have been withheld by the Government in the first place. He added that the accounting profession's view was that the interest rate for TRCs was too low, especially when compared with the existing rates offered by commercial banks for normal and large deposits. In order to compensate taxpayers for the temporary loss of the use of funds, in particular, those involving substantial values, some members suggested that a hierarchy of interest rates should be worked out with reference to the values of the TRCs and the duration of the hold-over. DS for Tsy noted members suggestions but pointed out that Government's role was not identical to that of commercial banks in this matter. He said that the Administration would nevertheless consider the question of interest rates with reference to the amount and time for which monies were held in the form of TRCs.
29.Referring to the amount of the supplementary provision, DS for Tsy pointed out that overspending in a particular year might be due to the statutory procedures involved for handling objection/appeal cases of previous years, which was outside the control of the Administration but was, indeed, a matter for the court to decide.
|30.Regarding the main purposes of requiring the purchase of TRCs, Deputy Commissioner of Inland Revenue (DC of IR) explained that this was to prevent any abuse of the hold-over provisions as a means of deferring tax payment; and to avoid any possible loss of revenue in the event that tax held over ultimately became irrecoverable. The Inland Revenue Department would decide on how each individual case should be dealt with on the basis of the information available at the time. She added that taxpayers raising objections to tax assessments could apply for standover of payment, in which case the Commissioner of Inland Revenue could either grant the standover unconditionally, or allow the taxpayers to buy TRCs or use a bank guarantee as a security against the disputed amount of tax.
31.Regarding the specific circumstances under which taxpayers would be required to buy TRCs, DC of IR said that it had been the policy of the Inland Revenue Department to allow taxpayers raising objections to tax assessments to apply for standover of payment subject to the approval of the Commissioner of Inland Revenue. However, in case the objection of appeal was considered to be frivolous or to have little or no merit, or if there were doubts about the financial positions of companies and hence, the ultimate collection of the tax involved, taxpayers would be required to buy TRCs. The existing arrangement tried to strike a balance between safeguarding tax revenue and protecting the interest of taxpayers. Presently, around 10% of the taxpayers who had raised objections to tax assessments were required to buy TRCs. She also advised that the number of cases ruled in favour of Government and that ruled in favour of taxpayers were about the same.
|32.A member opined that the Administration could conduct a review prior to the settlement of an objection or appeal to see if it was appropriate to release to taxpayers the amount held in the form of TRCs. Furthermore, the Administration could also make an early judgment on the period for handling the objection/appeal cases, and adjust the payable rate of interest according to the length of the period concerned. DC of IR noted the member's suggestion and would consider the feasibility of such proposals.
33.Regarding the Government's yield on monies held in the form of TRCs, DS for Tsy said that since the majority of Government's Funds was put in the Exchange Fund under the management of Hong Kong Monetary Authority, he did not have the detailed information in hand. However, there had been concerns about the investment strategies of the fiscal reserves, and the lower than inflation rate of return was considered moderate. In this regard, the interest rate on TRCs was higher than the rate of return of the fiscal reserves managed under the Exchange Fund.
34.Noting that the Government was required to pay the interest on TRCs in case the ruling was in favour of the taxpayers, a member enquired whether the alternative of using a bank guarantee would be encouraged. DC of IR said that this was purely a matter for the taxpayers to decide, having regard to the relative benefits of the options. Given that the interest to be redeemed by the Government would be subject to the decision of the court with reference to the market rate, there might be cases where taxpayers would be required to pay a high rate of interest.
35.Regarding the increase in the amount of TRCs purchased, DC of IR explained that this was partly attributable to the increase in the sale of TRCs under the Pay-As-You-Earn Scheme and partly to the increase in purchases in objection or appeal cases.
36.Noting that the Pay-As-You-Earn Scheme was presently available to employees and pensioners of the civil service only, a member enquired whether there was plan to extend the scheme to other taxpayers. DC of IR said that the Administration had consulted some of the major organizations in the territory. Whilst the initial responses were not very encouraging, the Administration would continue to look for possible ways to facilitate other taxpayers to take part in the scheme.
|37.In concluding the discussion, the Chairman asked the Administration to consider the members suggestions raised at the meeting and report to the Panel on the result of actions taken in due course.
VI Any other business
38.There being no other business, the meeting ended at 6:07 pm.
Provisional Legislative Council Secretariat
25 February 1998