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Submission to the Hong Kong Monetary Authority on Consultation Paper on the Review of the Three-Tier Banking System

  • Consultation Papers
  • 2023.09.25

  1. The Consumer Council (the Council) is pleased to submit views to the Hong Kong Monetary Authority (HKMA) in relation to the Consultation Paper on Review of the Three-Tier Banking System (the Consultation Paper), in particular consultation questions 1, 2, 7 and 8 which are of concern to consumers in Hong Kong.




  1. In the Consultation Paper, the HKMA revealed that according to its recent review, the existing three-tier banking system has become more complex than necessary to achieve a balance between flexibility of entry into the banking system and protection of small depositors, and that the market share of deposit-taking companies (DTCs) has dwindled to 0.07% in terms of total assets and 0.03% in terms of customer deposits[1]; the DTC sector currently has only 12 institutions and no new DTC licence application has been received by the HKMA since 2009.  According to the statistics of the Census and Statistics Department, the DTC sector held a total of HK$5,107 million customers’ deposits as of 31 March 2023[2].  The HKMA proposes, among other things, that:


  • The DTC sector be merged into the current second-tier (i.e. restricted licence banks (RLBs)) to form a new second-tier of the banking system.
  • Existing DTCs may choose to join the second-tier (i.e. RLBs) or upgrade themselves to join the first-tier (i.e. licensed banks (LBs)), or revoke their registration voluntarily and transform into other types of financial entities.
  • A transition period of 5 years be given to the existing DTCs to ensure they will migrate smoothly to the new framework.


  1. It was suggested that the proposed simplification of the three-tier structure would not have significant impact on the banking stability and market dynamics of Hong Kong.


  1. On the basis of the aforesaid information gleaned from the Consultation Paper, the Council has no objection in principle to the HKMA’s proposal to simplify the three-tier banking system to two tiers, with appropriate transitional arrangements in place to enable affected depositors to smoothly migrate to the new framework.  The Council’s response to Consultation Question 1 is therefore in the affirmative. 


  1. Nonetheless, the Council is mindful that the proposed change in the banking structure could potentially affect the rights of and protection to consumers.  In response to Consultation Question 8, the Council has reservations on the assertion that the proposed simplification shall not have significant impact on customers and depositors of the existing DTCs.


  1. With the objective of safeguarding the welfare of consumers and ensuring fair competition among banking service providers in Hong Kong, the Council sets forth the following observations and recommendations in relation to (i) transitional arrangements, (ii) market competition and consumer choice, (iii) close monitoring of the market, and (iv) the virtual banking in response to Consultation Questions 2 and 7.


Proactive Transitional Arrangements


  1. While considering the proposed 5-year transition period appropriate in length, the Council would like to emphasise that appropriate measures should be carefully put in place to ensure a smooth transition for all parties, including LBs, RLBs, outgoing DTCs and both existing and prospective customers of these financial institutions.


  1. The Council notes that upon implementation of the new framework, existing DTCs may choose to join the first- or second-tier or transform into other entities depending on their business models.  The Council urges the HKMA to provide necessary and sufficient guidance to DTCs to ensure that the rights and wills of their existing customers will be taken into account during the process, and that the customers will not suffer financial loss in any form and of any value as a result of the change, and notice well in advance of the change will be served on customers by DTCs.  The HKMA may also draw up standard migration procedures and offer assistance to DTCs in licence applications to facilitate their transformation. 


  1. The HKMA should also consider working with existing DTCs, RLBs  and LBs to facilitate the affected customers to migrate to other financial entities of their choice, and/or to switch to other financial products and services if they so wish on a timely basis; and the associated risks should be well communicated in advance.  Furthermore, the customers should not be required to pay any fees or charges, bear any associated costs or absorb any consequential loss due to delay or negligence of the DTCs, RLBs and LBs.   


  1. The HKMA may also consider assuming the role of a central information point to facilitate DTCs to update the public about their change of status.  For instance, a dedicated webpage could be set up to disseminate information such as official contact details of outgoing DTCs, details of enquiry channels, etc.  Apart from providing the necessary information to the public, the suggested webpage can also serve as a reliable source of information to assist affected DTC customers to verify the contact points of the companies and prevent them from falling victim to financial scams.  In addition, special measures should be put in place to ensure that advance notice of the change will be duly served to customers holding dormant accounts or those residing overseas.


  1. Publicity and public education are also indispensable in a smooth transition to the new framework.  The Council urges the HKMA to organise appropriate publicity and education campaigns to provide adequate information to consumers about the new framework, the options open to them during the transition period and their rights to migrate to other financial entities, to switch to other financial products and services, etc. as proposed above, so as to enable consumers to make informed choices in the course of the transition.


Concerns over Reduced Market Competition and Consumer Choice


  1. According to the Consultation Paper, there are currently only 12 DTCs, and their market share in the banking sector, in terms of total assets, customer deposits, and loans and advances, has dropped significantly in the past three decades.  It did not however provide further information on the total number of customers involved in DTCs, to allow the public to fully understand and gauge the extent of likely impact to consumers.     


  1. Notwithstanding that the number of DTCs is small, the Council considers that the effect of the proposed simplification of the banking system over market competition cannot be overlooked.  Cancellation of the third-tier will, on one hand, raise the entry threshold as the minimum capital requirement of authorised institutions will rise from HK$25 million to HK$100 million.  On the other hand, consumers who are for some reason unable (e.g. open a saving account) or unwilling to deposit with the first-tier institutions (i.e. LBs) will be left with the option of RLBs only and will be subject to the requirement of a minimum deposit of HK$500,000.  Such decrease in market competition and consumer choice is unfavourable from a consumer welfare point of view.


  1. Furthermore, with less market competition, customers of LBs especially those keeping deposits of less than HK$500,000 could face the problem of less favourable terms of service, such as lower interest rates and/or higher fees.  Studies in the UK indicated that large-scale banks usually focus on deals with larger businesses and adopt inflexible procedures or offer less favourable deals to smaller customers and businesses[3].  A study also found that acquisitions of small banks by large banks could cause low-income depositors to exit the banking system due to the higher fees charged[4].  The proposed simplification can therefore put pressure on small depositors who could originally obtain better services from DTCs under the three-tier system and may either increase their cost to obtain services or force them out of the banking system.  


  1. In addition to the problems related to deposit service identified above, the proposed simplification could also reduce the choices available to consumers in other financial services.  The Council notes from the annual reports of existing DTCs that in addition to taking deposits, many of them also provide other services such as fund management, personal loans, property mortgage loans, hire purchase loans, money remittance, etc.  Cancellation of the third-tier could also cancel these services originally provided by the DTCs.  Existing customers of the DTCs will have to turn to LBs, RLBs or other institutions outside the banking system for replacements.  In the worst case scenario, consumers with weaker bargaining power may not be able to obtain the same services from LBs, RLBs or other institutions and as a result be deprived of the services altogether.  The Council therefore calls on the HKMA to closely monitor the market to prevent the aforementioned unsatisfactory and/or unfair situations from occurring and to take appropriate measures to safeguard the rights of consumers.  


Sufficient Monitoring to Maintain a Healthy Market and Minimise Adverse Impact


  1. Although the HKMA does not anticipate significant impact on banking stability and market dynamics, the Council takes the view that as the proposed change is structural in nature, the financial market and the industry should be closely monitored during the 5-year transition so that appropriate measures could be taken in a timely manner when necessary. 


  1. From a consumer protection viewpoint, the Council suggests the HKMA to keep track of the transformation of outgoing DTCs throughout the 5-year transition period, especially those that revoke their registration (e.g. those that will not be invited to upgrade to RLBs or LBs) and migrate into other entities.  Consumer finance being one of the principal activities of some existing DTCs, it is believed that they may choose to become money lenders in view of the higher minimum capital requirement and higher minimum size of deposits in the new second-tier.   In a 2019 study of the Council titled “Money Lending – Reforming Law and Trade Practices for Consumer Protection”[5], it was found that the regulatory framework of money lenders in Hong Kong still have much room to improve to regulate the industry effectively.  Also, there lacks a sector specific regulator to provide guidance, timely intervention and prevention of problems in a holistic manner.  The Council is therefore wary that the proposed simplification of the banking system could indirectly encourage entries into the money lender market, or other financial activities.   Given the inadequacy of the current regulatory framework of money lenders in Hong Kong, the Council urges the HKMA to closely monitor the situation and to take timely counter-measures as appropriate to safeguard the interest of consumers.


Evolving Landscape of Virtual Banking


  1. As mentioned above, the proposed simplification may reduce market competition and lead to less choice for consumers.  Having said that, the Government’s policy to facilitate smart banking and establishment of virtual banks as part of its efforts to promote financial inclusion may mitigate the problem.  The Council inclines to support responsible development of virtual banks with proper consumer safeguards in place, so as to promote financial inclusion, bring in more market competition and increase the choices available to consumers.


  1. Currently, eight virtual banks have been in operation in Hong Kong since the HKMA’s authorisation of the first batch of virtual bank applications in 2019.  However, development and expansion of the industry have been slower than expected.  In 2021, the Council reviewed the virtual banking services in Hong Kong and, among other things, pinpointed the following shortcomings of the services provided by virtual banks:


  1. Variety of services available is limited.
  2. Cash deposits are not available. 
  3. Unless the virtual bank provides debit cards to facilitate payments at designated merchants or allow cash withdrawals at designated ATMs, account holders will have to first make a transfer from the virtual bank to another bank before funds can be used, which can be time consuming.
  4. As virtual banks do not have physical branches, communication and enquiries can only be done through instant messaging or calling the hotlines.
  5. If account holders have unfortunately lost their mobile phones or if their phones fail to function properly, they will not be able to use the banking services until after replacement or repair of the phones.


  1. Against this backdrop, and in view of rapid technology advancement and the post-pandemic financial landscape, the Council invites the HKMA to consider a review of the Guideline on Authorization of Virtual Banks as it has been more than five years since the Guideline was last revised.  The HKMA should also consider reviewing the market needs and dynamics, and further encourage new entrants to the virtual banking industry.  At the same time, efforts to promote digital literacy for the elderly, privacy protection and data security, are necessary in order to further expand the market.




  1. In short, the Council remains neutral to the HKMA’s proposal to simplify the three-tier banking system to two tiers with an appropriate transition period.  The Council urges that proactive arrangements should be undertaken to enable a smooth migration to the new framework and to safeguard the interests of DTC customers during the process.  Apart from sufficient guidance and monitoring, the HKMA could assume the role of a central information point to facilitate dissemination of information and public enquiry.  The effect of the proposal on market competition and consumer choices should not be overlooked and proper counter-measures should be put in place.  Last but not least, it may be an appropriate time to review the virtual banking market to further promote financial inclusion in Hong Kong.  

[3] Strategic Review of Retail Banking Business Models, Financial Conduct Authority, U.K. (December 2018).

[4] Vitaly M. Bord, Bank Consolidation and Financial Inclusion: The Adverse Effects of Bank Mergers on Depositors, Harvard University. (December 1, 2018).