President, in my capacity as Chairman of the Bills Committee on Clearing and Settlement Systems (Amendment) Bill 2015 (the Bills Committee), I submit the Bills Committee’s report to this Council and report on the key points of the Bills Committee’s work.
The current regulatory regime for stored value cards under the Banking Ordinance and the regulation on clearing and settlement systems under the Clearing and Settlement Systems Ordinance do not cover non-device-based stored value facilities (SVF) as well as the payment systems related to retail activities. The Clearing and Settlement Systems (Amendment) Bill 2015 (the Bill) is to amend the prevailing legislation to extend the coverage of the regulatory regime to non-device-based SVF and retail payment systems (RPS) in Hong Kong. The Bills Committee supports the Bill, in order to ensure the safety and soundness of SVF and RPS developed in Hong Kong, boost the efficiency of the payment industry, strengthen consumer protection and enhance Hong Kong’s position as an international financial centre.
As regards the regulation on SVF, the proposed section 8B requires that a person must not issue or facilitate the issue of an SVF in Hong Kong unless he holds a licence issued by the Monetary Authority (MA). Relevant licensing criteria are provided for in the proposed Part 2 of Schedule 3. The proposed section 8C(3) provides that a person must not knowingly promote or assist another person in issuing, or facilitating the issue of, an unlicensed SVF, including by means of providing network or Internet portal access or any other technological means, and it will be a criminal offence to breach this requirement. Some members were concerned that this provision seems to target Internet service providers (ISP), who may incur legal liabilities by providing web hosting or other Internet services to unlicensed SVF. The Bills Committee requested the Government to consider the need of including additional “safe harbour” provisions for the protection of the interests of ISP.
The Government pointed out that section 8C(3) is meant to stipulate explicitly the parties who may be liable for the offence. The provision does not impose a duty on any person, including ISP or website operators, to verify the licensing status of SVF issuers or the contents and accuracy of the promotional or advertisement materials provided by them. As a defence of “reasonable excuse” is already available under the provision, the Government considered it unnecessary to include additional “safe harbour” provisions or exemptions. The Government advised that the Hong Kong Monetary Authority (HKMA) may issue supervisory guidelines to facilitate compliance with the requirements after the passage of the Bill.
As regards the licensing criteria for SVF issuers, the Bills Committee agreed that licensees have to put in place measures to adequately protect the float; the Government has to ensure that the service contract to be entered into between an SVF issuer and the users is fair with the terms stipulated in a clear manner, in order to offer adequate protection to the users.
The Government explained that licensees are required to demonstrate to the MA that they have put in place measures to protect the float and that the float is kept separate from other funds of the licensees. While the Bill does not empower the MA to approve the contract terms, the MA will have to be satisfied that the applicants will maintain a prudent and sound SVF scheme and have in place proper risk management policies and procedures before granting an SVF licence. The MA may also review the operating rules of an SVF scheme in its ongoing supervision.
As regards the requirement for redeeming the outstanding stored value on an SVF, the Bills Committee expressed concern that section 8(b) of Part 2 of Schedule 3 allows issuers to set a deadline for redeeming the outstanding stored value. Members requested the Government to consider stipulating that issuers should not set any deadline for redemption unless under specified circumstances and with the MA’s prior approval. Members further stressed that the MA should ensure the redemption fees to be charged by issuers would be reasonable.
The Government pointed out that it is the commercial decision of an issuer to charge any fee or impose any deadline for the redemption of any outstanding stored value on a facility. The intention of section 8(b) is to make it a statutory requirement for an issuer to state the fee or deadline for redemption, if any, clearly and prominently in the contract with a view to ensuring users’ awareness and enhancing protection for them. Having considered members’ views, the Government will move amendments to section 8 to provide that an issuer must redeem the outstanding stored value on a facility as soon as possible after being requested by the user to do so, unless the MA has given prior written permission to the issuer that this requirement does not apply; and the issuer is required to state clearly and prominently in its contract with a user the relevant terms, including the outstanding stored value not being redeemable after a prescribed deadline, that prescribed deadline, any fee to be charged for the redemption, and so on.
The Bills Committee stressed that it should be a general principle to discourage issuers from setting a deadline for redeeming the stored value in the facility, and that the MA’s permission should only be granted in exceptional circumstances and under the situation that the users concerned would not be subject to any unreasonable treatment. The Bills Committee requested the Government to give the above undertaking during the resumption of the Second Reading debate on the Bill.
The Bill provides that licensed banks are deemed as licensed to issue or facilitate the issue of SVF as a line of business. The Bills Committee has discussed the rationale of the arrangement and how to ensure a level playing field between bank and non-bank SVF licensees.
The Government explained that the arrangement is in line with the existing “multi-purpose cards” regime under the Banking Ordinance (BO). The SVF business of a licensed bank together with its other lines of banking business will be subject to ongoing supervision by the MA on a consolidated basis. To ensure a level playing field as well as regulatory consistency, licensed banks engaged in SVF business will be required to comply with relevant requirements specifically tailored for the regulation of SVF under the proposed regulatory regime. To avoid regulatory overlap, certain regulatory provisions of the Bill, such as the minimum criteria in relation to principal business and financial resources, are not applicable to bank licensees, as they are already subject to consolidated supervision by the MA under the BO.
The Bills Committee noted that single-purpose SVF are exempt from the proposed regulatory regime. The exempt SVF are specified in the proposed Schedule 8. The Bills Committee has discussed the rationale for the exemption, as well as how the HKMA would monitor the business development of single-purpose SVF.
The Government explained that a single-purpose SVF is a bilateral contractual arrangement between a service provider and its respective users for advance payment for specific goods or services, and the degree of “moneyness” entailed by it is minimal, posing insignificant risks to the payment and financial systems of Hong Kong. To ring-fence the proposed regulatory regime to relevant payment facilities essential to financial stability, payment facilities which do not involve payment of money by users or have limited usage will be excluded from the regulatory regime. An issuer who intends to expand its SVF business from a single-purpose usage to a multi-purpose one must apply for a licence.
The Bills Committee was concerned about how the HKMA could regulate an SVF issuer with systems located outside Hong Kong. The Government explained that licensees are required to be companies formed and registered in Hong Kong. This will allow the MA to exercise effective supervision over the licensees even if some of their systems or operations are located outside Hong Kong. Furthermore, the MA will have to be satisfied that the minimum licensing criteria set out in Part 2 of Schedule 3 are fulfilled by the licensees on an ongoing basis. This will ensure the prudent operation of the licensees in the interest of users in Hong Kong.
The Government accepted the Bills Committee’s suggestion that there should be provisions to expressly prohibit SVF not licensed in Hong Kong from soliciting business from the Hong Kong public. In this connection, the authorities will move amendments to section 8ZZZJ to provide that a person must not publish an advertisement, invitation or document in Hong Kong or elsewhere relating to the issue or facilitation of the issue of an SVF, unless the advertisement, invitation or document concerned relates to the issue or facilitation of the issue of the facility by a licensee and the licence number is clearly stated. For clarity purpose, the amendments will include the definitions of “advertisement”, “invitation”, “publish” and “public”.
As regards the regulatory regime for RPS, the Bill empowers the MA to designate RPS and approve the activities allowed to be carried out through such systems. The Bills Committee has studied the proposed criteria. The Bills Committee held that the MA should take into account the experience and capabilities of RPS operators and exchange views with them before making decisions.
The Government advised that in considering whether an RPS is eligible for designation, the MA will collect information from the system’s operator or related persons and discuss the relevant issues with them. It is provided that the MA is required to publish in the Gazette notice of the intention, stating the grounds for the proposed designation of a system, and specify a period of not less than 14 days within which the operator of the system may make representations. Before making the designation, the MA must take into consideration any representation so made.
The proposed Part 3A provides for the investigation powers of the MA. There will be criminal sanctions for failing to comply with the MA’s relevant requirements, and the MA can impose civil sanctions on specified regulated persons. As the MA already has extensive powers of investigation over licensed banks under a relevant part of the BO, the Bills Committee noted the view of the Hong Kong Association of Banks (HKAB) that bank SVF licensees should be exempt from Part 3A of the legislation. In addition, the HKAB also expressed concern about the MA’s power to impose civil sanctions.
The Government reiterated that, given that SVF business is distinct from banking services and to ensure a level playing field between bank and non-bank licensees, bank licensees would need to comply with the requirements of the proposed regulatory regime which is specifically tailored for the SVF business. The investigation powers of the MA should be applicable to bank and non-bank SVF licensees consistently to serve the regulatory purposes of the Bill. The MA also has separate investigation powers for banks and may impose sanctions, including a civil fine, under the Securities and Futures Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. The MA’s decision to impose a civil sanction is subject to review by the Payment Systems and Stored Value Facilities Appeals Tribunal.
The Bills Committee noted some deputations’ concerns that the Bill lacks the interface between the banking and retail systems, as well as open data interchange, and so on. Some members opined that the Bill should adopt a forward-looking approach in order to facilitate the development of innovative SVF or RPS products or technologies in the market; and the Government should introduce measures to encourage open data interchange.
The Government advised that the Bill neither prescribes nor pre-empts a particular choice of format, standard or technology in relation to the operations or data transmission between a clearing and settlement system or an RPS and an SVF scheme. This is to avoid creating unnecessary restriction to the future development of relevant technologies or discouraging system operators from making any enhancement or innovation in accordance with market demands, business needs or technological developments. The MA will continue to engage the banking and payment industries to facilitate the evolving financial infrastructure development in the financial markets.
As regards the publicity on the regulatory regime, the Bills Committee stressed the need for the Government to promote public understanding of the new regulatory regime to protect the rights and interests of users.
The Government pointed out that the Bill requires the MA to establish and keep a register of SVF licensees for public inspection. The Bill also requires a licensee to display clearly its licence number on the physical device if the SVF is device-based, or state clearly the number on each communication network concerned if the facility is network-based. In relation to any designated RPS, the Bill requires that the designation will take the form of a Gazette notice to keep the public informed. Upon passage of the Bill, the Government plans to roll out relevant education and publicity programmes to enhance public understanding of the use of payment facilities.
The Bills Committee supports the resumption of the Second Reading debate on the Bill and has no objection to the amendments proposed by the Government, the details of which are set out in the report. The Bills Committee will not propose any amendment.
President, my personal views on the Bill are as follows. Multi-purpose SVF may sound unfamiliar, but when one refers to Octopus Card, PayPal or Alipay, most people know what they are. Octopus Card was introduced in Hong Kong more than 10 years ago when we were pioneers in stored value cards. After a decade or so, while we can see the emergence of various payment facilities around us, Octopus Card remains the only familiar facility to the public; one may also have heard of other similar payment facilities, but not everyone has used them. Today, apart from shopping on the street, people may shop online as well or even watch drama or download songs and movies through the Internet. The payment facilities used in their transactions are different from traditional ones.
President, I would shop online occasionally. Apart from credit cards, various payment facilities, such as PayPal, Alipay, Apple Pay and so on, with which we are familiar, may also be used on many of the shopping websites. Very often, these payment facilities require advance deposit of money or purchase of stored value units before use. Nowadays, many stored value cards are not just restricted to a single shop. More of them may now be used for shopping at more than one vendor, a trend in the global consumption pattern.
A payment facility is unpopular because people may be unfamiliar with and apprehensive about it. The reason for this is that local legislation fails to catch up, so consumers may have doubts about this. Hesitation on the part of consumers may engender further reservation among enterprises in developing and promoting these payment facilities, resulting in many of these facilities not gaining a foothold in Hong Kong. Internet is a borderless sphere accessible by all, but transactions conducted online may go unprotected by legislation, and consumers stand to lose in case any problem arises. To strengthen protection for consumers, our legislation has to keep abreast of the times. Therefore, I support the Bill because following its passage, all companies under regulation will have to keep the float and the deposit separate from their business funds, in order to assure redemption of the stored value in case anything goes wrong.
In March this year, we invited the public to air views on the Bill. The most commonly heard remarks from the industry players then were that relevant legislation has to be forward-looking and receptive of innovation to help Hong Kong develop into a centre of Internet-based financial transactions; and legislative amendments should be made to inspire the development of payment systems tailored for the local market, rather than merely coping with those known or existing payment facilities. There was also the view that while overseas mobile payment systems are already in use in Hong Kong, owing to the absence of corresponding legislation, there are still problems and uncertainties in respect of clearance and regulation. Members may also note the risks of banks and non-banks issuing these payment facilities. One can well imagine that the industry has expectations for the Bill in the hope that more comprehensive safeguards will be available following the legislative amendment compared with the protection rendered by the existing legislation.
In recent years, a number of Bills and items of subsidiary legislation under the charge of the Financial Services and the Treasury Bureau involve the combat against money laundering, and supervision of banks has become increasingly stringent. According to the replies given by public officers and the HKMA to me, it is a key objective of the Government to combat money laundering. The Bill also provides that licensees issuing payment facilities are required to have in place procedures against money laundering in their internal control processes, as such facilities may very often be used by criminals as tools to transfer proceeds of offences or illegally obtained money. That is why the authorities attach enormous importance to it. Globally speaking, anti-money laundering control on the payment facilities outside of the banking system has become increasingly stringent. The HKMA has also expressly stated that the same standards and yardsticks will be applied to banks and non-banks in respect of measures against money laundering.
Under the legislation, regulatory authorities are empowered to impose penalties on law-breaching licensees or even suspend their licences. In a meeting of the Bills Committee, I asked about the protection available to consumers in case of temporary suspension of licence. A public officer said unequivocally that if a licence is to be revoked or temporarily suspended, the HKMA will consider how the rights and interests of consumers as holders of relevant payment facilities are to be protected when making such decisions. When making such decisions, the HKMA must consider how licensees are going to properly return to the consumers the value to be redeemed, or put in place some operational restrictions to partially allow their continued operation, such that the consumers may continue to use the facilities while the companies concerned do not take on new customers. The HKMA may give a written consent to relevant companies allowing them to partially continue their operation for the protection of consumers.
President, I know that many SVF platform companies from China and overseas are interested in carrying on such business in Hong Kong. I hope that through the amendments proposed by the Bill today, they will expeditiously start their operations in Hong Kong, while consumer protection can be strengthened and operators offered a level playing field. Of course, I also hope that with a level playing field, we can see continuous innovation in respect of financial payment facilities to make Hong Kong a leader in shopping that takes place across the border, on the Internet as well as in the physical sense.
Thank you, President.
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