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Introduction

1. The Consumer Council (CC) welcomes the opportunity to provide views to the Hong Kong Monetary Authority (HKMA) regarding a consultation report entitled Review of the Hong Kong Monetary Authority's Work on Banking Stability.
   
   
2. The scope of this submission is confined to recommendations made in the report that have direct implications to consumer interests. Whilst the submission contains comments on the consultant's recommendations, some preliminary thoughts are also provided in relation to the recent financial market crisis, with a view to stimulating discussion on what can be done to further improve Hong Kong's financial regulatory framework and thereby enhance consumer protection.
   
   
3. The Council understands that the Secretary for Financial Services and the Treasury will undertake a systemic review on Hong Kong's regulatory framework upon receipt of the reports from the HKMA and the Securities and Futures Commission (SFC) on complaints related to the Lehman matters. As the matters affect the interests of the general public, the Council suggests that the reports be made available for public information and consultation on the review of the regulatory system be carried out in due course.
   
   
4. The Council will continue to monitor the development of the matters, with a view to providing further inputs to the Government and the industry regulators when necessary.
   
   

The Council's Views

(1)    The HKMA's functions and powers in the Banking Ordinance (BO) - The HKMA's role in consumer protection

* To prepare a guideline under the BO setting out the HKMA's role in consumer protection

5. The Council is happy to see that the consultant has taken up its suggestion of formalising the role of the HKMA in consumer protection by recommending the issue of a formal guideline under the BO to set out how the HKMA should exercise this aspect of its functions. The Council notes that the consultant did not recommend that the HKMA be given a specific statutory responsibility for consumer protection, for reason that it could lead to an undue diversion of resources away from prudential issues to consumer issues.
   
   
6. The Council understands that the HKMA is engaged in a number of activities which could, in certain extent, protect the interests of consumers in the banking sector. However, it appears that the HKMA does not allocate a lot of resources to proactively act on consumer related work.
   
   
7. This may be due to the fact that the HKMA's statutory role is that of promoting the general stability of Hong Kong's banking system and therefore its current supervisory work centres on effective working of the banking system. There is no explicit mandate for the HKMA to protect consumer interests, for instance, to promote public understanding of the banking/investment products, and to secure the appropriate degree of protection for consumers.
   
   
8. Whilst not denying the importance of maintaining the general stability and effective working of the banking system in Hong Kong, the Council believes that there should be adequate safeguards to protect the interests of consumers, regardless of whether they are acting as banking depositors or investors, from market malpractices since any failures may run the risk of diminishing consumer confidence in the banking system which in turn will have impact on the banking stability.
   
   
9. It is noted in the report that the HKMA has concerns about dealing with consumer complaints itself as there may be inherent conflict between being a prudent regulator and a consumer protector. The HKMA considers making decisions in some cases will be against the interests of banks and could impair their financial standing or market reputation.
   
   
10. However, the Council understands that consumer protection objectives are embedded in the statutory functions of similar regulatory bodies overseas, such as the UK's Financial Services Authority and Singapore's Monetary Authority of Singapore. Similar consumer protection objectives can also be found in the local context - one of the principal functions of the Securities and Futures Commission (SFC) in Hong Kong is to provide protection for members of the public investing in or holding financial products; and the Insurance Authority in Hong Kong is to ensure that the interests of policy holders or potential policy holders are protected. The Council considers it important to explore further how these regulatory authorities under their respective laws are able to strike a balance between being a prudent regulator and a consumer protector.
    
    
11. In Hong Kong, consumers have become increasingly exposed to more risky classes of investment products sold through banks. This could result in significant capital losses for consumers, especially for those with inadequate knowledge of the products. The Lehman issue is a case in point and illustrates the importance of enhancing the regulators' financial education efforts so that consumers/investors can better understand the risks and returns of the products in which they are investing, and refrain from investing in products they do not fully understand.
    
    
12. To enhance consumer confidence in Hong Kong's banking system, the Council considers it important to expand the scope of the HKMA's function by incorporating consumer protection objectives, whether in the form of a guideline or a specific statutory responsibility for consumer protection. The Council considers that the HKMA should deploy more resources on the following areas of works:

• To carry out consumer education activities and to raise consumers' awareness of their financial capability so that they will be equipped to make informed choices about financial issues;
  
  
• To improve the quality of information disclosure for consumers (e.g. ensuring banks are more attuned to their customers needs and will give appropriate information and active programme to increase customers' understanding of financial matters); and
  
  
• To ensure financial institutions are giving sufficient priority to treat their customers fairly and make it a key part of its regular monitoring, risk assessment and risk mitigation programmes. The scope of this work should cover financial institutions' marketing tactics and their complaints handling.
  
  

* To consider the need for a banking ombudsman in Hong Kong at some point

13. The Council notes the consultant's suggestion for the HKMA to consider the need of setting up a banking (or more generally a financial services) ombudsman in Hong Kong at some point, particularly as wealth management activities expand.
    
    
14. At present, the Council plays a role in dealing with consumer disputes in the banking sector, either when there is dissatisfaction with the in-house dispute handling mechanism provided by individual banks, or if the consumer has chosen to approach the Council directly in the first instance. However, in both scenarios, the Council has to rely on persuasion to secure a remedy directly with the bank concerned.
    
    
15. On the other hand, the HKMA as banking regulator has the advantage of being able to obtain first hand information on the issue complained about, and this will facilitate regulatory actions (e.g. suspension or revocation of authorisation) to be taken on justified cases. Having said that, the HKMA has no power to levy financial penalties, to issue public reprimands or to order compensation to complainants.
    
    
16. The Council considers that this may be appropriate timing for discussing whether Hong Kong should have an ombudsman in place to deal with disputes arising in relation to financial services. It is particularly so since more disputes concerning investment products can be expected, such as the case of Lehman's and when employees are allowed to choose their own MPF schemes. The Council believes that the Government should consider setting up a task force to examine the effectiveness of the various dispute resolution mechanisms in Hong Kong including the option of a financial services ombudsman, for resolving individual disputes between banks and consumers.
    
    
17. The Council further considers that whatever mechanism is introduced to resolve disputes between consumers and members of the banking sector (or the financial sectors generally), core principles (e.g. independence) need to be applied to ensure that the mechanism is effective and fair.
    
    

* To strengthen the HKMA's powers of sanction in the BO

18. The consultant recommends strengthening the HKMA's powers of sanction under the BO, including the issue of public statements and ability to fine.
    
    
19. The Council has long been advocating the HKMA taking a more transparent approach in disclosing wrongdoers in the banking sector (not only confined to intermediaries who deal with securities activities). Making accessible details of the HKMA's enforcement decisions or warning notices issued to banks or bank staff serves the important purpose of enabling the industry, the market and consumers to understand better the types of behaviour that would be considered as unacceptable.
    
    

(2) Authorization - The three tier structure

* To reduce the current three-tier structure to two tiers

20. It is recommended in the report that the three tier authorization structure should be simplified to two tiers (banks and other "deposit-takers").
    
    
21. The Council is of the view that in having a category with different levels of prudential control in terms of capital adequacy requirements and exposure limits, differences should be clearly defined. Any diminution of safeguards as a result of the distinction should be made apparent to consumers so that they would not be confused as to the status of the financial institutions that deal with their financial businesses. The Council is glad to see that the consultant has expressed similar views in the report.
    
    
22. A related issue of concern to the Council is how the HKMA will cope with the situation if some of the existing authorized institutions do not opt for or are unable to satisfy the requirement for an upgrade of licence, and they simply give up their authorized status and participate under an unregulated environment. The Council suggests the HKMA to assess the degree of risk, and monitor the potential impact of reducing to a two tier authorization structure, in order to ensure any changes made would not have the effect of increasing the financial risk to the public.
    
    
23. With regard to redefining 'small deposits' as one of the distinctions to be maintained in a two tiered system, the Council is of the view that a high threshold would preclude other deposit-takers from taking "small deposits" since clients will not be covered by the Deposit Protection Scheme (DPS). The Council considers that setting up a high deposit level is likely to enhance segmentation of the market so that other deposit-takers can cater for targeted groups of high net-worth clients.
    
    
24. Having said that, even if high net-worth clients are supposed to be more knowledgeable and discreet with their own funds management, the Council cautions that there should be adequate warning given to alert the public about the difference between the proposed two tiers and the protection status of the financial institutions under the DPS (in particular if no change will be made to exclusion of non-banks from the DPS upon expiry of the Government's recent pledge of deposit guarantee in 2010).
    
    
25. The Council considers that the dividing line between the two tiers should be reviewed from time to time taking into account any change in the coverage cap of the DPS.
    
    
26. The Council further suggests that the type of authorized institutions to be covered in the DPS should be kept under review, to take account of development of market strategies and changes in consumer behavior that may result from the simplified tier structure.
    

(3) Safety net arrangements - Deposit protection scheme (DPS)

* To review the current level of deposit protection

27. The Council notes the recent measures taken by the Government to strengthen depositors' confidence in the Hong Kong banking system. Since the measure of using the Exchange Fund to guarantee the repayment of all customers deposits held with all authorized institutions is currently meant to be a short term measure, the Council is of the view that the review of the level of deposit protection should not be set aside.
    
    
28. In its previous submissions and views given to the consultant, the Council expressed that the existing coverage cap of HK$100,000 was quite low (in terms of the percentage of value of deposits covered) in comparison to some overseas countries, and also raised the problem arising from the use of the term "deposit" in structured deposits which are not included in the DPS. The Council had therefore urged for regular review of the coverage cap and the treatment of structured deposits under the DPS.
    
    
29. Against such background, the Council supports the consultant's recommendation of reviewing the level of deposit protection, with a view to increasing the coverage level. Further, the Council considers that the types of deposits eligible for protection under the DPS should also be reviewed. It is hoped that the results of such review will advance the limited protection currently available to Hong Kong consumers and strengthen the confidence of depositors in the banking system.
    
    
30. Furthermore, the Council suggests that a mechanism with clearly defined criteria (not confined to the percentage of depositors to be fully covered by the DPS) for triggering review and adjustment on the coverage limit should be considered.
    
    
31. With regard to cost issue involved in raising the protection limit, the Council notes the consultant's view that the level of coverage can be improved without increasing the annual premium. The Council therefore urges any such review to explore this aspect and to ensure that the cost implication arising from increasing the level of protection would not be fully borne by the depositors.
    
    
32. On a related issue about the deposit protection status, the Council is concerned that there could be confusion to the public in view of the Government's guarantee valid to end of 2010 for the repayment of all customer deposits for all financial institutions in Hong Kong (i.e. licensed banks, restricted licensed banks (RLBs) and deposit-taking companies (DTCs)), which is different from the DPS where RLBs and DTCs are not covered. This may create a problem after the expiry of the Government's deposit guarantee because the public may have built up in the meantime a perception/misconception that all financial institutions and all deposits are protected.
    
    
33. The Council considers that a clear message must be given informing the public about the different arrangements under the DPS and the Government's current deposit guarantee. This is particularly important as some financial companies have already actively responded to the new measures by offering relatively high interest rates to attract retail deposits. It can be expected that in a low interest environment, a lot of consumers may be attracted to deposit with non-DPS financial institutions on the assumption that the Government's deposit guarantee will remain in force beyond 2010.
    
    
34. From the perspective of enhancement of deposit protection, the Council suggests that the Government should take this opportunity to explore the feasibility of including non-banks (i.e. RLBs and DTCs, or the proposed "other deposit-takers") in the DPS to offer better protection to depositors in Hong Kong.
    
    
35. A related issue is the public's understanding of the types of deposits protected under the DPS. In this regard, it is important for DPS members to make clear to depositors what deposits are protected. Despite that there are at present rules requiring DPS members to disclose what are the items offered for sale at banks which would not be covered under the DPS (such as time deposits with more than 5-year maturity, securities and mutual funds), the Council is concerned that depositors would wish to have positive information (i.e. the types of deposits which are protected by the DPS). To avoid any possible confusion as to what is eligible for protection under the DPS, the Council is of the view that banks should make clear and easily understood to their depositors the types of deposits that are "protected deposits", and the netting arrangement in relation to the setting off of depositors' liabilities in determining the payout to depositors.
    
    
36. In particular about the netting arrangement, the Council considers that the public may not be fully aware of the fact that DPS compensation will be calculated based on a depositor's net deposit balance. This has great implication since many banks offer "all-in-one" or "integrated" accounts which may combine various activities (including current, savings, time deposits, investments, overdraft facilities, credit card balances, mortgage loans and insurance plans). Depositors may misunderstand that the total balance in their all-in-one or integrated accounts would be covered by the DPS. Enhancing transparency may reduce the prospect of unnecessary disputes arising from such misunderstanding.
    
    

(4) Trends and Issues - Erosion of financial boundaries

* To assess the industry's concerns about the operation of multiple regulators

37. As noted in the report, there were expressed concerns by a number of interviewees that "sometimes the efforts of the HKMA and the SFC seem to have been duplicated, e.g. requests for records and other documentation and investigation enquiries." On the issue of regulatory neutrality, there were concerns on the part of the brokers that authorized institutions get softer treatment from the HKMA than they would from the SFC. It is therefore recommended in the report that the HKMA should undertake an assessment of whether the industry's perceived concerns about the operation of multiple regulators are indeed valid.
    
    
38. The Council appreciates that the financial regulators have established supervisory cooperation and harmonisation of policies and procedures across different functional areas and strengthened communication among themselves (banking, securities, and insurance). But the latest event calls into question the need for the Government to consider whether the current approach is the best way to go ahead in view of the increasingly complex financial products sold across sectors and many consumers lack the capability to make effective financial decisions in the face of persuasion.
    
    
39. Financial institutions are expanding beyond their traditional product boundaries by providing customers with new and innovated products and services. In view of these product and market changes, there is a need for the Government to initiate a review to study whether functional regulation with separate bodies responsible for different sectors or a single regulator would be more appropriate for the case of Hong Kong. The sale of investment products related to Lehman Brothers is a case in point. Aggrieved complainants approached different financial regulators for assistance as problems with marketing materials of investment products are vetted by the SFC and sales practices of bank staff are overseen by the HKMA.
    
    
40. Bearing in mind also the industry's concerns, a single integrated regulator for all types of financial services provided in Hong Kong may reduce the need for financial institutions to have to deal with multiple regulators and enable a more consistent regulatory view to be taken of the whole of the financial sectors.
    
    
41. In brief, a single integrated financial regulator to oversee all financial institutions in Hong Kong can have the following advantages to consumers and the industries:

• Single regulatory contact point to consumers: Blurring of financial products renders it difficult for consumers to identity the appropriate regulatory authority for advice and lodge their complaint. This could be simpler and more direct for consumers.
  
  

• Consistent regulatory and supervisory framework ensuring a level-playing field across all market segments, sectors and activities: The existing different regulatory frameworks for different financial institutions could create regulatory gap and discrepancy (if some regulators are taking a more lax approach in supervising the intermediaries' operation) which may not work to the interests of consumer.
  
  
• Compliance cost could be lowered as industries will only need to deal with a single regulator: This cost reduction may be passed on for benefit of consumers.
  
  

42. Nevertheless, the Council understands that introducing a single regulator is not a panacea for tackling all the problems, and the checks and balances required in the case of a merged regulation need to be given careful consideration. The Council therefore suggests the Government to consider initiating a study to look into the suitability of introducing a single integrated financial services regulator in Hong Kong.
    
    

Consumer Council