How safe is your money in the banks? Or, specifically, are your savings fully protected by the Government deposit guarantee currently in place?
The answer is, however, less than clear-cut as the Consumer Council has found in an effort to enhance consumer awareness of the existing deposit protection arrangements.
The issue is a complex one to the ordinary depositors, with banks varying in practice from one to another.
The crucial factor seems to lie in the types of deposits and financial products as well as their terms and conditions.
Consumers will do well to ascertain with their banks or authorized institutions (AIs) if their deposits and assets are eligible for protection and make appropriate decision accordingly.
They should find out, for instance, whether the account opening document or the prospectus of a deposit product has specified that the product is not protected.
All AIs, including banks, when offer any financial product described as deposit but not subject to deposit protection, are obliged under the present requirements to inform depositors that such a product is not protected.
The attention of consumers is drawn also to the following in particular.
First and foremost, in general, four types of deposits are not eligible for protection: (a) structured deposits (such as foreign currency linked and equity linked deposits), (b) secured deposits (as collateral to secure a banking facility), (c) bearer instruments (such as bearer certificates of deposits), (d) time deposits with a maturity longer than 5 years.
In addition, common financial products such as bonds, stocks, warrants, funds and insurance policies are also excluded.
However, the difficulty is to distinguish whether or not a deposit in an account falls within the definition of "protected deposit" under the deposit protection arrangements and thus whether or not it is eligible for protection.
For example, a few structured deposit products with features of fixed interest rate (similar to time deposit) and early redemption option (at the bank's discretion) are in fact protected deposits.
Whereas, a mortgage product which puts deposit and mortgage accounts under one roof to allow customer to deposit money into the account and to save on interest cost by reducing outstanding net balance, together with a standby credit line, may not be protected.
This is because any deposits placed in the account can be regarded as funds held for early repayment of the mortgage or are pledged.
Also a financial product bearing the name "deposit" is not necessarily equivalent to a protected deposit. Check out with the bank or AI to ascertain.
Secondly, concerns have been raised on deposits pledged as security in integrated accounts, and as such these deposits will not be eligible for protection.
The concern is that the automatic provision of overdraft credit facility in some integrated accounts may be without the knowledge of the customers and, further, regardless of whether or not they have used the credit facility extended to them.
To rectify the situation, upon notification of the status of your account, consumers can choose to consider the need of having secured credit facility, to cancel the facility or, if applicable, cap the deposit amount used as collateral for credit facility and promptly inform the bank.
Thirdly, eligible deposits are protected regardless of the currency (both Hong Kong dollars and foreign currency) in which the deposits are denominated.
But consumers holding RMB accounts should ascertain as to whether their accounts are opened directly with a Hong Kong bank or are placed with a bank in the mainland through a Hong Kong bank. The former RMB account is protected but not the latter which is treated as off-shore deposits.
Fourthly, as the Government deposit guarantee applies to more authorized institutions, i.e. restricted licensed banks and deposit-taking companies over and above the bank members of the Deposit Protection Scheme, consumers in search of higher interest rates may switch their savings to these deposit taking institutions.
Consumers should, however, check out whether an institution is approved by the Hong Kong Monetary Authority as an Al and bear in mind that the Government deposit guarantee will remain in force only until the end of 2010. There is no indication of an extension thereafter.
Lastly, the Council is concerned about the adequacy of the notification arrangement requiring all banks and authorized institutions to issue, between April and the end of May 2009, a product-specific notice to draw attention of customers holding non-protected deposits.
The Council deems that giving only negative disclosure (i.e. notifying only on deposit products not eligible for protection) is not the complete solution as it does not remove entirely the uncertainties that depositors may have with the protection status of the financial products held in their accounts.
The concern is that depositors who do not receive such notice cannot and should not assume that all their deposits and assets are protected.
Further, for whatever reasons, depositors may not receive such notification due to inaccurate postal address or missing mail.
Positive disclosure is, therefore, called for to put to rest any uncertainties and give consumers the full confidence for which the current Government deposit guarantee is intended.
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