Introduction
1. The Consumer Council is pleased to submit its views to the Hong Kong Monetary Authority (HKMA) regarding the second public consultation paper on the introduction of deposit insurance in Hong Kong.
Deposit Insurance Board
2. The Council supports the proposed establishment of a statutory independent Deposit Insurance Board to administer the DIS. Separation of governance between the Board and the supervisory authority avoids conflict of interest and provides greater accountability and transparency to the public.
3. With regard to the composition of the Board, the Council welcomes that the proposed composition will comprise a majority of lay members to ensure sufficient independence. The Council suggests that consumer representatives should also be invited on the Board to express the wider community interest.
4. The Council understands that in order to achieve cost effectiveness the Board would be kept at a minimal size which thereby necessitates the need to appoint agents or authorize third parties to perform some of its functions. Given the sensitivity of information involved in the DIS, the Council agrees that confidentiality provisions should be written in the DIS legislation for which the Board including its staff members and appointed or authorized parties should be duty bound to keep information obtained in carrying out their delegated functions confidential. This will enhance public confidence on the DIS and promote the stability of the banking sector.
Appeal System
5. The Council welcomes the setting up of a separately constituted tribunal to allow depositors to appeal against the Board's decision on compensation payment or refusal to make payment. The Council suggests that the procedures and rulings of the tribunal should be made transparent to the public and documented beforehand and to allow consumer representation on the tribunal.
Membership
6. In its previous submission, the Council expressed queries as to what effect the HKMA's future plan of converting the current three-tier structure of authorization to a two-tier system will have on the membership of the DIS. In these circumstances questions will arise as to whether second tier institutions would, as a result of amalgamation under the proposed two-tier structure, be allowed to access small deposits, such as a minimum of $100,000; and whether these deposits should then be covered by the DIS.
7. If the revised structure leaves these institutions in a position where they may be perceived by consumers to be little different to licensed banks, but they are not covered by the DIS, then some safeguards should be put in place to ensure that any misperceptions regarding DIS coverage are corrected. Moreover, the fact that some institutions under the current system are not covered should also be subject to some safeguards to ensure that consumers are not led into believing that safeguards exist when they do not.
8. In this regard, the Council considers that where any authorized institutions (whether they are RLBs, DTCs or exempted foreign banks) are excluded from the DIS, then consumers should be in a position where they can readily ascertain the status of those institutions. However, in addition to requiring these institutions to disclose their non-DIS status for public information, it would seem preferable that DIS insured banks should be required to display some form of official DIS sign or logo at their premises, thereby allowing consumers to distinguish between DIS and non DIS institutions.
Coverage
9. In the consultation paper, "insurable deposit" is limited to the definition of "deposit" under the Banking Ordinance; with the exception of some deposits such as time deposits with a maturity date of more than 5 years. The Council agrees that a clear definition of "insurable deposit" is important to depositors. Depositors would wish to have more concrete information on the types of deposits insured by the DIS. For example, what is eligibility for protection under the DIS, what are the exception items, and whether securities, mutual funds or similar types of investments that may be offered for sale at DIS insured banks would be covered under the DIS. Making the definition of "insurable deposits" transparent and easily understood not only gives certainty to depositors but also reduces the prospect of unnecessary appeals against the Board's decision.
10. The Council therefore sees the need for the Board to assume the responsibility of promoting the DIS to the public.
11. With regard to the proposed coverage limit, the Council notes that the coverage limit has been finally set at $100,000, instead of $200,000. This implies that the level of protection will be lower in terms of the percentage of depositors fully covered [1], and the percentage of value of deposits covered1. The Council pointed out in its previous submission that the proposed coverage limit is less than our major trading partners. Nevertheless, recognizing that a higher cap may incur extra costs and funding, the Council accepts the proposed coverage limit, but suggests that a definite time range, rather than using the discretion of the Board, should be set for reviewing and adjusting the coverage limit.
Exclusion of Deposits
12. In relation to the exclusion of deposits booked with a foreign office of a failed participating bank, the Council expressed concern in its previous submission whether banks would encourage depositors' funds to be deployed overseas in order to avoid DIS coverage. If this were to become a common marketing strategy, rules would need to be made obligating participating banks to disclose non-DIS coverage of these accounts.
Accrued Interest
13. The Council welcomes the proposal that any interest accrued on an insurable deposit would be included with the principal amount in the calculation of the coverage limit of the DIS. This would, in particular, benefit small depositors.
14. The HKMA seeks comment on what should transpire in circumstances where:
- payment has been made by the DIS before the appointment of a provisional liquidator;
- the DIS (according to HKMA) should be entitled to claim, in the liquidation, the interest accrued on the amount of the payment made by the DIS between the date on which the DIS pay out was triggered and the date on which the provisional liquidator was appointed (the paper refers to this as the 'twilight zone');
- a depositor has more than one deposit (each bearing a different interest rate) and the aggregate amount of such deposits and accrued interest exceeds the coverage limit; and
- in these circumstances it is necessary to determine how the compensation payment by the DIS (which would be $100,000) should be apportioned to the depositor's different accounts so that the liquidator could determine the respective entitlements of the DIS and the depositor in the liquidation.
15. The HKMA offers two options.
- Option (1): Compensation payment would be apportioned among the different deposit accounts of a depositor on a pro-rata basis.
- Option (2): Section 227E of the Companies Ordinance would be amended so that the DIS pay out triggered date would be taken to be the date of appointment of provisional liquidator (in the event that payment was made by the DIS before the appointment of a provisional liquidator). This would fully align the respective treatments of accrued interest by the DIS and the liquidator.
16. On balance, the Council would tend to favour option (1) as a compensation payment determined on a pro-rata basis would be fairer to all depositors, notwithstanding the higher liquidation costs in apportioning deposits and calculating interest entitlement.
Foreign Currency
17. The consultation paper proposes that the DIS should make all compensation payments in Hong Kong dollars, irrespective of the currencies the deposits are denominated. If this proposal is accepted, depositors may inevitably face some foreign exchange risk. Nevertheless, the Council welcomes the proposed transparency rules to be set up in advance with respect to the choice of exchange rate used to calculate the payout as this provides some certainty for depositors.
Netting Approach
18. The Consultation Paper notes two main options in relation to the setting off of depositors' liabilities to a failed participating bank:
- Partial netting - the DIS should only set off contractually due and past due liabilities of a depositor against deposits in determining the amount of his entitlement; and
- Full netting - a depositor's liabilities would be completely set off against deposits before his entitlement is determined.
19. The HKMA has indicated that in view of difficulties in amending insolvency legislation, and the need to minimize the costs of the DIS, it proposes that the DIS should apply full netting in determining the payout to depositors, in accordance with the current insolvency law and practice.
20. As a consumer advocate, the Council is inclined to favour partial netting because depositors will be better off as only contractually due and past due liabilities would be set off against the depositor deposits. Adopting a partial netting approach would also help to mitigate the cash flow problems encountered by depositors caused by bank failure, thereby achieving the objectives of a DIS to protect the cash flow as well as the beneficial interests of depositors.
Interim Payment
21. The Council welcomes the suggestion that a lesser sum may be paid to a depositor as interim settlement where there is uncertainty as to the depositor's overall net claim and/or in the interests of a speedy payout. This can restore depositor confidence and avert any crisis and stop potential spillover effect. However the Council suggests that clear guidelines setting out the conditions under which interim payments will be made should be put in place at the earliest opportunity after the creation of the DIS. This is to clarify the entitlements of depositors and assure them that procedures will be in place to provide relief in the context of a bank failure.
Funding
22. The Council notes from the consultation paper that the Hong Kong Association of Banks (HKAB) has proposed certain variations aimed at lowering the cost of the DIS further. These include a lower target fund size, a lower upper fund limit, a longer fund build-up period, a cap on surcharge and government contribution to the DIS fund.
23. By benchmarking certain international standards and credibility, the HKMA has commented that the HKAB proposals to reduce the fund size might undermine the credibility of the DIS. However, the HKMA accepted HKAB's proposal to reduce the upper limit to +15% while maintaining the -30% lower limit. In other words, this would increase the likelihood and frequency of rebates. The consultation paper has not however provided any supporting statistics to illustrate why, as HKAB stated, the proposed +/- 30% target range was "excessively wide". The Council queries whether a reduction in upper limit would still provide an adequate buffer to the DIS as was originally considered necessary.
24. The Council also does not support a further reduction of the proposed $1.5 billion target fund size. This is because the reduction implies protection to depositors might be further reduced.
Premium
25. The consultation paper proposes that a differential premium system based on CAMEL ratings will be used to calculate premiums for individual banks; and that participating banks should be required not to disclose any information which may reveal their CAMEL ratings.
26. The Council accepts using a risk-based rating approach would be fair for all participating banks. In its previous submission, the Council discussed the issue of maintaining an appropriate level of rating confidentiality. As a matter of general principle the Council believes that consumers should have access to information in order to make an informed choice. Nevertheless, the Council accepts the sensitivity involved in disclosure of ratings.
Miscellaneous
27. The Council suggests that a contingency plan for administering payouts in the context of a bank failure be required to be drawn up by the DIS beforehand setting out how the DIS will effect immediate release of funds to depositors. The reason being that at a time of failure there will be confusion and a certain level of alarm on the part of depositors. A set of clear rules and procedures should be made available to the public via pamphlets and/or posting information on website, to reassure depositors that at the time of a bank failure, the DIS will be able to effect a speedy and systematic payout to lessen the burden on depositors.
1 The percentage of depositors fully covered and the percentage of value of deposits covered will be reduced, from 91% to 84%, and from 28% to 20%, respectively. These figures are extracted from the HKMA's consultancy study on enhancing deposit protection in 2000.
