Submission to the Hong Kong Deposit Protection Board on Consultation on Enhancements to the Deposit Protection Scheme in Hong Kong

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1. The Consumer Council (the Council) is pleased to submit its response to the Hong Kong Deposit Protection Board (DPB) regarding the consultation paper (the Consultation Paper) on the proposed changes to the Deposit Protection Scheme (DPS) in Hong Kong.

2. The Council sets out below its overall view on the DPS, followed by views on the DPB’s specific proposed changes to the protection limit, the levy arrangement, the coverage in the event of a bank merger, and the representation regime.  The Council further provides its views and suggestions on other matters relating to the DPS which are important for the protection of consumer interests.

The Need for a Strong and Comprehensive DPS in Hong Kong

3. The Council desires to see a wider and stronger safety net provided to depositors in case of bank failures, and hence welcomes the DPB proposing enhancements to the DPS.  The Council notes that the DPS is especially important to economically vulnerable depositors and their families, whose lives would be suddenly and violently upturned should their hard-earned savings evaporate without means of compensation.  

4. Moreover, a strong and comprehensive DPS can increase banking stability and enhance public confidence in the banking industry.  The Council also opines that enhancements to the DPS can help increase consumers’ confidence in depositing at banks that are smaller in size, thus smaller banks may better compete with the larger ones.     

5. The Council acknowledges that shrewd risk management by banks, prudential regulation, sound supervision, and a robust resolution regime can complement the DPS, and hence opines that oversight of banking institutions should remain vigilant.  However, these elements are no substitute for a strong and comprehensive DPS.  Taking an example, the run on a local bank in 2008 saw thousands of anxious depositors queuing up to withdraw their savings, but it was triggered by unfound rumours on the financial health of the bank_[1].  Rumours feed on the anxiety and self‑preservation instincts of depositors, trumping calm and rational considerations of whether the bank is actually financially sound.  As such, a robust reassurance to depositors that they can receive compensation for their savings in case of bank failures serves a distinctive purpose for banking stability.

Protection Limit (Consultation Question 1)

6. The Council welcomes the proposed raise of protection limit of the DPS from HK$500,000 to HK$800,000 on a per depositor per bank basis.  This raise is expected to help the DPS achieve full coverage for 92.2% of depositors, up from the 88%-89% coverage ratio in recent years as mentioned in para. 35 of the Consultation Paper.  The Council welcomes the proposed increase as it would more than make up for the loss in actual degree of protection caused by inflation and would increase protection for depositors in a real sense.  Raising the protection limit would also allow more depositors to be fully protected. 

7. In comparing the adequacy of coverage level in protecting depositors across jurisdictions, the Consultation Paper provided that the enhanced protection limit as a percentage of per capita GPD will jump from the current 129% to 206%, lifting Hong Kong’s position to the middle range (ranked 6^th) among 12 jurisdictions selected for the review; the deposit value covered will increase from 20% to 25.2%; and the coverage ratio by depositor will increase to 92.2%, above the international guidance of at least 90%.  

8. Nonetheless, the Council is aware that even with a coverage ratio of 92.2%, the DPS in Hong Kong is still playing catch‑up with its international peers on this metric.  According to data from the International Association of Deposit Insurers (IADI), the median global coverage ratio in 2022 was 98%, with median of G20 economies at a higher ratio_[2].  For example, the United States (ranked 3^rd by protection limit as a percentage of per capita GDP) fully covers more than 99% of its deposit accounts, with a USD250,000 (HK$1.95 million) protection limit_[3].  The Council considers that in the long run, Hong Kong should strive for a higher protection limit and coverage level such that as one of the leading international financial centres, Hong Kong’s depositors can enjoy a degree of protection comparable to other developed economies.

Levy Arrangement (Consultation Question 2)

9. The Council considers it desirable to reduce the time needed for the DPS Fund to reach the new target fund size, and concurs that a protracted build‑up period would undermine credibility of the DPS and public confidence in it.  The Council notes that IADI also considers it essential to have a reasonable time frame to achieve the target fund size_[4].   

10. According to para. 60 of the Consultation Paper, since the launch of the DPS in 2006, the target fund size has yet to be reached.  Although that target would be met this year under the existing protection limit, the proposed increase in protection limit will lengthen the build-up period by at least three years as stated in the Consultation Paper.  Moreover, given that the DPS would periodically be reviewed and revised to ensure protection limit is still adequate, such revisions would potentially lead to further increases in the target fund size and hence further prolong the build‑up periods.

11. With an eye to speeding up the process for which the DPS needs to reach the target fund size under a higher protection limit, the Council thus supports the proposal to broaden the circumstances under which the build-up levy becomes chargeable again, to cover the situation where the protection limit is raised regardless of whether the target fund size as a percentage of protected deposits is changed or not.   

12. The Council also opines that the DPB should scrutinize whether there is a need to increase levy rates, in order to help reduce the time needed to reach the target fund size.  Currently, based on the risks of individual banks, the four tiers for build-up levy range from 0.0175% to 0.049% of a bank’s protected deposits while that for the expected loss levy range from 0.0075% to 0.02% (Table 5 of the Consultation Paper).  Meanwhile, in Singapore, the premium that banks contribute to the deposit insurance scheme currently ranges from 0.025% to 0.08% of the insured deposit base, according to whether the bank is a foreign bank and its ratio of assets maintained in Singapore to liabilities arising from its insured deposits_[5].  Comparatively, there seems to be room for Hong Kong to increase levy rates without compromising on competitiveness.

Coverage in the Event of Bank Merger (Consultation Question 3)

13. The Council supports the proposal to provide time‑limited enhanced protection to depositors impacted by bank mergers.  After a bank merger, depositors may seek to divest the combined deposits in other banks to enjoy the maximum degree of deposit protection.  The proposed enhanced arrangements can accord depositors extra protection while they take time to make such an arrangement. 

14. The Council notes that according to the IADI, depositors of merged or amalgamated banks should enjoy separate coverage, up to the maximum coverage limit, for each of the banks for a limited but publicly stated period_[6].  As such, the Council concurs with the proposed arrangement of affected depositors being entitled to compensation in respect of their protected deposits in each of the banks, as if the merger or amalgamation had not happened.  As to the duration of this enhanced coverage, the Council considers that the proposed six‑month duration or for protected time deposits maturing after the end of the proposed six‑month period, until their original maturity dates, are acceptable lengths of time.

15. The Council further opines that from a consumer protection point of view, providing timely reminders to affected depositors of the applicability of the enhanced coverage is also of critical importance.  As such, the Council agrees with the proposal by the DPB that banks involved in a merger or acquisition should notify affected depositors of the enhanced arrangements and duration as soon as practicable after obtaining approval of the merger or acquisition.  On top of this, the Council considers that depositors should be reminded about the expiration of the enhanced coverage, including being reminded some time before the end of the arrangement, for example one month prior, and a notification at the end.  In addition, the Council considers that the DPB should require the banks involved to make sure that the channels or means adopted to inform affected depositors, on top of public notification, are effective in notifying them and to require the banks to seek individual acknowledgement from affected depositors that they have indeed received the message.   

Representation Regime (Consultation Questions 4 and 5)

16. The Council considers it critical that the public knows if a financial product is protected by the DPS or not.  As such, in addition to improving the representation made by financial institutions as to the protection status of financial products, it is also necessary to deepen the public understanding of which products are protected through ongoing and up‑to‑date education and publicity efforts, given the constant emergence of innovative financial products in the market. 

17. Moreover, while the representation made by financial institutions is important, it should also be effective, and not overbearing to the point where it becomes a nuisance and induces consumers to ignore future communications or warnings.  In this respect, digital channels offer not only a conduit for banking services and transactions, but also opportunities and challenges for informing consumers in an effective manner.

18. The Council agrees on the importance of ensuring membership signs are prominent in the digital space as well as in physical branches and that customers are aware of the DPS membership status of banks.  Yet, with regard to the proposal that DPS members should display the membership sign on the page that appears immediately after customers log on to online and mobile banking applications, the Council advises that in implementation, the design of the applications should take into consideration the possibility that customers may become indifferent or irritated by seeing the sign in every single instance of logging in, hence defeating the purpose of informing customers.

19. In addition to the display of membership sign, the Council also wishes to take this chance to make suggestions on the representation of the protection status of financial products.  Disclosures of the protection status of individual financial products should be written in simple and easily understood language, and be displayed in a clear and prominent manner.  This applies not just to physical channels, but also digital channels.  DPS members should also be encouraged to test digital disclosure approaches to ensure effectiveness from consumers' perspective, taking into account factors such as screen sizes, font sizes, minimum scroll down time, and prominence of the information. 

20. Furthermore, the Council suggests that apart from making the negative disclosure arrangements, DPS members should be required to publish and maintain a list of all protected financial products on their website.  This information can facilitate the clarity, transparency and understanding of the protection status of financial products for consumers.  The Council notes that in the recent consultation on changing the deposit protection scheme in Singapore, the Monetary Authority of Singapore also proposed requiring scheme members to publish and maintain a list of all its products which are insured deposits on their website_[7]. 

21. As regards the proposal to allow DPS members to streamline negative disclosure requirements for private banking (PB) customers, in the form of making disclosures and obtaining customers’ acknowledgement on a one‑off basis, the Council concurs that disclosure requirements can be relaxed for sophisticated customers, so as to better balance consumer protection and regulatory burden.  However, the Council suggests setting an appropriate duration, for example three years, for the validity of the one-off disclosure arrangement of long-term products and that after this period, another disclosure to PB customers and acknowledgement from them is required to renew the validity.  This revised approach would supplement the proposed annual reminder by periodically seeking acknowledgement from PB customers that the relevant product is not protected.

Other Suggestions on the DPS

22. In addition to the above points that concern the proposed changes to the DPS, the Council wishes to put forward suggestions on other areas which would further help the DPS in protecting consumer interests, for consideration of the DPB.

Enhanced protection for temporary high balances

23. The Consultation Paper proposed providing extra protection to depositors impacted by bank mergers, which the Council supports.  However, the Council opines that this is not the only occasion when depositors may suddenly end up with an account balance that far exceeds the protection limit.  Life events such as inheritance, real estate transactions, benefits payable from an insurance policy, personal injury compensation, or death of a holder of a joint account, may have the same impact on account balances.  The Council opines that enhanced protection limits should also be provided to depositors facing such life events for a temporary period, for example six months, while they make arrangements to maximise deposit protection such as divesting the sums in multiple banks.

24. The Council notes that such extra protection is provided in other jurisdictions including the United Kingdom and European Union.  For example, in the United Kingdom, the Financial Services Compensation Scheme provides protection of up to £1million (HK$8.6 million), far higher than the usual £85,000 (HK$732,226) limit, for six months for temporary high balances due to certain life events as abovementioned.  The relevant authorities would review available evidence such as property sale receipts, court judgement, letters from insurers, and wills, to check for sufficient connection between the relevant life event and the sums in the account in question, to establish eligibility_[8].

Timely review of the DPS

25. The Council emphasises the importance of conducting timely review of the protection limit and coverage of DPS to ensure its effectiveness in safeguarding the interests of depositors.  The Council thus welcomes the DPB mentioning in the Consultation Paper that it would stay agile and review the protection limit as and when necessary, and that the next review would take place within five years, as stated in para. 58 of the Consultation Paper.  The Council advises that future reviews need to be timely, and that extra attention should be given to accounting for the effects of inflation and considering ways to meet the challenge that large proportion of total deposits remain unprotected. 

26. According to para. 37 of the Consultation Paper, the protection limit was last raised in early 2011 and between then and March 2023, inflation had increased by 39%, meaning the real value of the existing protection limit had effectively deteriorated by the same percentage over the period.  From a consumer protection point of view, this level of lagging behind in actual protection is highly undesirable.  The Council notes that the previous enhancement of the DPS in 2016 did not include raising the protection limit, despite the Composite Consumer Price Index having risen 22% between January 2011 and January 2016_[9].  The level of decrease in the real value of protection has therefore accumulated over time.  The Council hence urges that future reviews of the protection limit should give extra consideration to the impacts of inflation so that the real value of protection is at least maintained, if not enhanced.

27. The Council is also aware that even with the proposed increase of the protection limit to HK$800,000, the share of total deposits covered would be at 25.2% only, according to para. 36 of the Consultation Paper, meaning the majority of deposits remains unprotected.  The Council notes that for the bank runs occurring in the United States in March 2023, the vast majority of deposits of the affected three banks were uninsured, and this exacerbated the situation by causing deposit outflows from the three banks.  Although increases in protection limit reduce bank run risk from depositors covered, this risk can also be driven primarily by a small fraction of depositors who hold large concentrations of deposits_[10].  As such, the Council opines there is still a need for authorities in Hong Kong to consider how to minimise the occurrence of bank runs and failures given that the majority of deposits is and would remain unprotected.

28. In this connection, the Council notes that the Federal Deposit Insurance Corporation in the United States had published a report in May 2023 on options for the reform of the deposit insurance system and tools to complement the system, and that the report evaluated three options relating to deposit insurance coverage, namely limited coverage, unlimited coverage and targeted coverage_[11].  The report also raised ideas such as requiring secured deposits and assets for large uninsured deposits or placing constraints on the withdrawal of deposits above the deposit insurance limit_[12].  The Council opines that Hong Kong should pay close attention to developments and discussions overseas, and give consideration in a timely manner any bold but necessary revisions to the DPS that can minimise bank run or failure risks and strengthen depositor protection.

Increase public awareness of DPS

29. The Council considers it is important for the public to know about the DPS and its main features, such that they can enjoy peace of mind when depositing in banks and would not be easily swayed to make a run on the bank when there are rumours or signs of bank failures.  However, the public opinion survey commissioned by the DPB in 2022 found public awareness of DPS at 78.1%, and that of whom, 83.1% knew about the current protection limit and 84.2% were aware that the protection provided was of a statutory nature_[13].  If public awareness level in the survey refers to the proportion of persons aware of the scheme, this would imply roughly 65% of the public know about the limit and statutory nature of the protection.  According to the annual reports of the DPB for the last five years, public awareness level has been stationary, hovering between 78% and 79% based on its annual surveys_[14]. 

30. The Council is pleased to note that the DPB has organised various publicity campaigns and educational outreach activities such as talks on the DPS for elderly, students and ethnic minorities, social media campaigns, and flea markets.  The DPB should continue its promotional and educational efforts to raise awareness about the DPS and the protection limits and coverage.  

31. The Council further notes that the publicity and educational efforts by DPB has gone beyond merely promoting DPS, such as encouraging saving behaviour amongst the public_[15], and that the DPB has been promoting its role as the “Guardian of Deposits”_[16].  In recent years, frauds and scams have become increasingly prevalent and problematic, causing victims to lose their hard‑earned savings.  The Council suggests that the DPB may consider cooperating with banks and law‑enforcement agencies to carry out anti‑fraud educational initiatives based on the theme of “deposit protection”, leveraging the rapport the public has with the DPB’s iconic characters Ah Chuen and Ah Po.  Such initiatives can aim to encourage the public, especially vulnerable groups, to monitor the activities of their savings accounts for unusual transactions and be alert to scams, while also raising public awareness about the DPS.  The DPB may also encourage banks to pay more efforts in this regard.

Broadening the applicability of DPS

(i) Coverage for deposits in restricted licence banks and deposit-taking institutions

32. The Council suggests that the DPS should cover not only licensed banks, but also other deposit‑taking institutions in Hong Kong, namely restricted licence banks (RLBs) and deposit-taking companies (DTCs).  The Council notes that the DPB had explained that the percentage of depositors at restricted licence banks and deposit-taking companies with a deposit balance below the current DPS protection limit was relatively low, and hence the extension of DPS coverage to them might not add much to the general banking stability.  While the argument may be valid through a financial system stability lens, it does not hold water from a consumer protection point of view.  Customers of the other two types of deposit‑taking institutions should similarly be accorded the same kind of protection, as long as the nature of the deposits (i.e. receiving money from the general public) are similar to those covered under the DPS.  The proposed increase in the protection limit, along with the consultation launched recently in June 2023 by the Hong Kong Monetary Authority (HKMA) on simplifying the structure of the three‑tier banking system, offer a timely opportunity to consider expanding the DPS membership to all deposit-taking institutions.

(ii) Coverage for structured deposits

33. The Council notes that structured deposits are not covered by the DPS.  Back in 2009, the DPB stated that as structured deposits were more akin to investment, not popular with small depositors, and it was difficult to make fast compensation payments on them, the DPB did not recommend protecting structured deposits.  However, the DPB had set triggers for reviewing their protection status, in terms of the share of small depositors holding these deposits amongst all depositors.  Given the passage of time, the popularity of structured deposits may have increased amongst small depositors.  As such, the Council opines it would be desirable for the DPB to provide periodic updates on this statistic and whether the percentage figure had reached the review trigger, which in 2009 was stated as 3% for all structured deposits and 2% for individual types of structured deposits_[17].  The Council considers that it is in the interests of consumers to include structured deposits in the DPS, as their exclusion may discourage consumers from an alternate investment choice with a potentially higher return compared to traditional deposit products.  In the meantime, the Council considers that additional consumer education is necessary to help consumers understand what structured deposits are and that such deposits are not covered by the DPS, given that they are often marketed in a way that downplays their riskiness.

(iii) Protection for virtual assets

34. As regards the protection for rapidly evolving virtual assets, while understanding that many virtual assets are of a speculative nature and do not warrant the same kind of protection provided to deposits, the Council notes that stablecoins is a kind of virtual asset that aims to maintain a stable value and can potentially be a means of payment and stores of value.  The HKMA had also mentioned that stablecoins have the potential to have relatively broad and frequent interconnection with the mainstream financial system and regular commercial, financial and economic activities_[18]. 

35. Given this potential, out of consideration for stability of financial systems and by extension protection of financial consumers, the Council opines that in the upcoming regulatory regime for stablecoins slated for this year or next, the HKMA and the DPB should consider carefully what kind of financial safety net to provide to stablecoin holders, for example DPS protection or protection of a similar nature.  The Council notes that internationally, there has been discussion about applying financial safety nets to stablecoins_[19], and it is important for Hong Kong to keep abreast of international developments.

(iv) Protection for deposits in stored value facilities

36. The Council also opines that the DPB and related authorities such as the HKMA should keep in sight ways to enhance protection for funds held in stored value facilities (SVF), given the prevalence of SVF.  According to the HKMA, at the end of the second quarter of 2023, there were almost 66 million SVF accounts in use and the total float and SVF deposits amounted to HK$16.5 billion_[20].  Currently the float and SVF deposits held by a depositor with a DPS member are not protected by the DPS.  Yet, the amount of these monies is sizable, and as SVF gain popularity in use, consumers are likely to place larger sums in their SVF accounts to enjoy greater convenience. 

37. The Council notes that there are jurisdictions that have extended deposit protection coverage to the funds of SVF customers.  For example, in the United Kingdom, the Prudential Regulation Authority amended rules in March 2023 to make depositor protection available to customers of e‑money institutions and payment institutions, should the bank holding the funds that customers provided to e-money institutions and payment institutions fails_[21].  Hong Kong should closely monitor international developments and conduct timely reviews to consider the most appropriate approach of providing protection for SVF customers.  In any case, as long as the float and SVF deposits remain unprotected by the DPS, related authorities should provide educational reminders to ensure consumers understand this and to remind consumers to consider carefully the need to transfer funds into SVF accounts and pay close attention to the account balance.

Increase cooperation and information exchange with other jurisdictions

38. Offshore deposits, such as deposits at overseas or Mainland branches of the banks, are not protected under the DPS.  However, it is not uncommon for locals to make offshore deposits, for example opening a Mainland bank account to use e‑wallets in the Mainland or using offshore banking to prepare for emigration or studying abroad.  The Council opines that increasing cooperation and exchanging information with deposit insurers in other jurisdictions can enable the DPB to provide on‑the‑ground information and support to members of the public who have offshore deposits and may be affected by bank closures in the Mainland or overseas.  It can also facilitate the DPB staying abreast of the latest international developments in deposit insurance.

Conclusion

39. The Council welcomes the efforts of the DPB to provide a stronger and broader safety net to depositors, especially the increase in protection limit in real terms and the temporarily increased protection for depositors affected by bank mergers.  The Council opines that a strong and broad DPS can protect depositors’ interest and strengthen the stability of the banking system as a whole, and the Council hopes that the above comments and suggestions on the consultation proposals and other aspects of the DPS, can help the DPS be even more robust and comprehensive.

40. While the Council supports enhancing protection for depositors, it also has concerns that associated costs may be shifted to bank customers (i.e. consumers) despite the levies being collected from the banks participating in the DPS.  The Council considers that the DPB and the authorities should monitor the situation to avoid unreasonable cost transfer to bank customers.

41. Lastly, the bank runs in the United States during the first half of 2023 illustrate that even with a deposit insurance scheme, bank panics are not a thing of the past.  Moreover, the banking and financial environment is constantly evolving, with new products and technology frequently appearing on the horizon.  As such, there remains the need for Hong Kong to stay vigilant, monitor international developments, and undertake timely review of the DPS, to ensure protection for depositors remains strong and effective in the face of new challenges.