INTRODUCTION
1. The Consumer Council is pleased to submit its views on the consultation paper released by the Hong Kong Monetary Authority (HKMA) on a package of measures devised to improve the business practices of authorised institutions (AIs) in relation to the provision of credit card services.
COUNCIL RESPONSE
2. Overall, the HKMA's recommendations are a welcome and prompt response to the recent ruling of First Instance on an action brought under the Unconscionable Contracts Ordinance. The Council wholeheartedly supports the principle behind the HKMA's recommendations that the terms and conditions for credit card services should be fair and transparent to consumers.
3. The Council notes however, that the recommendations are directed only to Authorised Institutions (AIs) which are under the HKMA's jurisdiction; and are therefore not applicable to non-AIs. The Council understands some non-AIs are also involved in the provision of credit card services, although there are no official statistics on the market shares for these entitles. The Council would also expect that the recommendations in relation to credit card services will apply to non-AIs on a similar basis to that of AIs.
4. Listed below are the Council's comments in response to the HKMA specific recommendations.
Recommendation 3.1: AIs should have due regard to applicable laws in Hong Kong when drawing up the terms and conditions for credit card services.
5. While this recommendation does little more than exhort AIs to observe the law, the Council nevertheless welcomes this recommendation as it brings to the AI's notice the existence of applicable laws, and reinforces the need to pay attention to how terms and conditions are drafted.
6. The recent court ruling on the Unconscionable Contracts Ordinance made reference to the lack of competition on terms and conditions in credit card contracts; particularly on debt collection processes. As most competition centres around rewards and other benefits of card usage, the scope for competition on terms and conditions on debt collection practices is limited. Some uniformity on terms and conditions will therefore most likely eventuate. Indeed, insofar as the terms and conditions are not onerous, some uniformity could be encouraged. Nevertheless, the possibility of competition emerging on terms and conditions between AIs should be kept open, to allow them the scope to use this facet of marketing the product, if the opportunity arises.
Recommendation 3.2: A copy of the written terms and conditions should be provided at the request of customers (or prospective customers).
7. At first glance, this recommendation appears somehow lesser a requirement than that in the Code of Banking Practice. Clause 5.1 of the Code states "institutions (AIs) should make readily available to customers written terms and conditions of a banking service". According to the HKMA, AIs have indicated, first, that providing the terms and conditions, which are quite lengthy and detailed is cumbersome when marketing the cards. Moreover, in reference to the Code, AIs feel they are not obliged to do so up front because a bank/customer relationship is not established until a credit cardholder actually uses a card. Therefore, AIs do not provide a copy of the terms and conditions to applicants for credit card services at the time of making the offer, as they are not at this point considered as "customers" of the AIs.
8. The HKMA now recommends that terms and conditions should be provided on request, recognising the awkwardness of including the terms and conditions with marketing material, but giving consumers the opportunity to view the terms and conditions if they want to; at the time of the offer, and before the card is used.
9. The Council considers that a full set of terms and conditions should be made available to consumers, at the very least for making comparison on the different card services available in the market. This will enhance consumer choice and possibly motivate some competitiveness in what terms and conditions are made available in contracts. Moreover, having regard to the recent court case, providing consumers with a copy of the terms and conditions when they enter into agreement could help to safeguard the enforceability of the terms and conditions, which in turn can only be in the interests of AIs. If this point is not resolved to the satisfaction of the consumer's interest, AIs may, in circumstances where the terms and conditions are the subject of dispute, find themselves exposed.
10. The UK experience on this point is worthy of note. The Consumer Credit Act 1974 lays down certain requirements which must be satisfied when a credit card agreement is made. If they are not, then banks cannot enforce the agreement against the consumer without a court order. In particular, the Act requires that a leaflet enclosing an application form for a credit card must contain a full set of terms and conditions; which include details on financial and related particulars (i.e. APR, handling charge), interest calculation, payments, loss or misuse, personal information, ending agreement, etc.
Recommendation 3.3: Customers' attention should be drawn to major terms and conditions which impose significant liabilities or obligations on their part. These terms and conditions should be highlighted in application forms, and written in plain language (both Chinese and English) and in clear and legible print.
11. The Council supports this recommendation as this will enhance transparency of terms and conditions of banking services. However, the recommendation is not all that different to current provisions in Clause 5.4 of the Code requiring highlighting of penalty provisions; although it does seem to be clarifying them. Of particular note is the current wording of the Code concerning rights of set-off claimed by the institution over credit balances maintained by the cardholder with the institution. This is a matter the HKMA emphasises should be highlighted. Without expressing an opinion on the propriety of inserting 'setting off' provisions in contracts, the Council suggests that banks should at the very least make conditions clear to consumers as to how they will apply the right of 'set-off'.
Recommendation 3.4: AIs should be prepared to answer any queries of customers (or prospective customers) relating the terms and conditions for credit card services.
12. The Council supports this recommendation, particularly as the HKMA has exhorted banks to train staff in order to fully comply with the provision.
Recommendation 3.5: Any cost indemnity provision should only provide for the recovery of costs and expenses which are of reasonable amount and were reasonably incurred.
13. The Council supports the spirit of this recommendation. However, the Council notes that there is no definite criteria set out in the paper on how to evaluate whether an item of expense ought to be incurred, or whether the amount incurred is reasonable. It being left to the AIs to assess on their own. There are general guidelines given by the HKMA to assist AIs to determine the reasonableness of the charges, i.e.:
- the prevailing market practices;
- the reputation of the agents; and
- the AIs past performance in dealing with them.
While the HKMA's guidelines are well intentioned, the three factors noted above could be equally interpreted against the consumer interest. For example, prevailing market practices may be of a standard that results in excessive costs being applied in the process of debt collection.
14. An issue at point is the current practice to charge debtors a fixed percentage for debt collection fees. The HKMA has stated that at present most debt collectors charge 25% of the debt. While this level of fee might be suitable for some of the more recalcitrant debtors that AIs deal with, it could well be unsuitable for other debtors who are more easily persuaded to repay their debt. Ultimately, whether a charge which is in dispute is reasonable, is up to the courts. While the Council has little more to add to this matter, it does consider that the recommendation on improving transparency in costs and expenses, in the following Recommendation 3.6 will assist consumers in getting advice on whether debt collection fees are considered reasonable.
15. In addition, in view of the public concern on this matter, the Council suggests that the HKMA should monitor the level of charges levied by banks. This should be done with a view to obtaining information on prevailing market practices, and assessing the effectiveness of the following recommendation, which seeks to increase transparency on the quantum of charges.
Recommendation 3.6: At the request of debtors, AIs should provide a detailed breakdown of the costs and expenses for which debtors are required to indemnify the institution.
16. The Council supports this recommendation as it would allow debtors the opportunity to seek clarification on the costs and expenses, and seek independent advice in order to form a view on whether they consider the costs and expenses claimed are reasonable.
Recommendation 3.7: The annualised percentage rate (APR) of interest charged by AIs in respect of credit card lending should not, unless justified by exceptional monetary conditions, exceed the legal limit as stated in the Money Lenders Ordinance.
17. In principle, the Council supports bringing the interest limit requirement of AIs in line with that of money lenders, in order to bring some certainty as to an upper limit, given that currently there is no upper limit. The Council believes that this recommendation will partly resolve the concern that the interest charged by some AIs was extortionate and was unreasonable to consumers.
18. However, bringing the interest limit for AIs in line with money lenders raises the question as to why it has been chosen as a benchmark, given that the same circumstances for money lenders, that gave rise to a ceiling of 60%, do not necessarily apply to AIs. For example, money lenders would be expected to charge consumers at a higher interest rate than AIs, as the risk involved for them may be higher than that of AIs. The Council therefore requests that some clarification be provided for justifying the setting of a 60% limit on AIs.
Recommendation 3.8: AIs should quote the APR of interest for credit card products to facilitate comparison between difference charging structures.
19. The Council fully supports the HKMA taking a definite decision requesting all banks to use a common formula to disclose the "true" cost of credit card borrowing to customers.
20. The Council has long urged the banking industry to use a common method for calculating APR of credit card advances and that all relevant fees and charges should be taken into account in the calculation of APR. However, according to the proposed guideline by the HKMA, "all fees and charges, with the exception of annual card fees, should be taken into account". This is slightly different from the Council's original suggestion previously made, and the form adopted in the UK, where all fees and charges are included. The reasons given by the HKMA for exclusion of annual fees are because they may often be waived in Hong Kong, and the annual card fees do not form part of the cost of credit card (as it depends on whether the cardholder makes use of the credit facility).
21. However the Council is of the view that although annual fee waiver of credit cards for the first few years is a common practice in Hong Kong, banks have discretion to impose the fee after the waiver period. Borrowers may not get the waiver for certain and the fee would then become part of the cost for borrowers.
22. With regard to unsecured consumer lending other than credit cards, such as revolving cash card, annual fees of these credit facilities will normally not be waived, as in the case of credit cards. In light of this, the annual fee can be a cost for borrowers. The Council therefore suggests a slight amendment on the proposed guideline by the inclusion of annual fees in the calculation of APR.
23. In addition, the Council would also like to comment on the proposed APR assumptions. The application of a net present value (NPV) formula on APR for installment personal loans, as in the UK Consumer Credit Act, is straight forward because the repayment period is well defined. However, the NPV formula on APR calculation for credit cards and other revolving credit, as in the HKMA's proposal and in the UK Consumer Credit Act, is based on a strict assumption of the behaviour of borrowers, such as making a minimum payment each month, and lasting for a 1-year horizon. It is therefore questionable whether the assumption is realistic for flexible credit facility, as opposed to an installment personal loan, which has an agreed repayment period. The Council therefore suggests the listing of, say, 1-month, 6-month, and 1-year APRs, as that would provide consumers with more relevant information.
24. Further, the assumption of making minimum repayments will affect the calculated APR, when different institutions adopt different minimum payment requirements. It is suggested to choose the highest minimum payment requirement in the industry, say 5%, as a standard for calculation of APR.
Recommendation 3.9: Provided that cardholders have not acted fraudulently or with gross negligence their maximum liability for unauthorised transactions before the card loss is reported should not be higher than HK$500.
25. The Council supports setting out a limit as this will provide certainty to consumers as to the maximum liability they may encounter in the event of a lost card. It is noted that the proposed maximum limit of HK$500 is higher than US (US$50 = HK$390), New Zealand (NZ$50 = HK$160) and Australia (AUS$50 = HK$210), but it is lower than UK (GBP50 = HK$570). In view that the maximum limits set in other comparable financial centres are mostly lower than the proposed maximum limit of HK$500, the Council therefore suggests some consideration be given to lowering the limit, for example, to HK$400.
Recommendation 3.10: While principal cardholders are held liable for the debts of supplementary cardholders, supplementary cardholders should not be liable for the debts of the principal cardholders.
26. The Council supports this recommendation as it will provide clarity to the issue, given there are current differences in AIs' practices.
27. Whether supplementary holders should be held liable to repay the debts incurred by themselves under the supplementary cards, the Council follows the US view that a supplementary cardholder should not be liable for debts incurred. This is on the grounds that a supplementary card can be considered as a "gift" provided by the principal cardholder to the supplementary cardholder. For example, parents who give minors supplementary cards would be paying for their debts.
28. Further, a principal cardholder has the authority to set a credit limit on a supplementary card. This implies that the principal cardholder has accepted responsibility for the card, and is able to control the possible outcome of card usage.
