Consumer Council Submission on the Proposed Establishment of an Investor Education Council and a Financial Dispute Resolution Centre in Hong Kong

1. The Consumer Council (the Council) is pleased to submit its views concerning a consultation document issued by the Financial Services and the Treasury Bureau (FSTB) on the proposed establishment of an Investor Education Council (IEC) and a Financial Dispute Resolution Centre (FDRC) in Hong Kong.
2. The following sets out the Council's views to the specific issues (in bold italics) raised in the consultation document that have direct implications to the interests of consumers/investors.

Part I - IEC

Question 1:     Do you agree to the need to establish the IEC as a dedicated investor education organisation in Hong Kong that holistically oversees the needs of investor education and delivery of related initiatives in respect of the entire financial sector in Hong Kong, and works to improve the financial literacy and capability of the investing public? Please explain.

3. The Council agrees that there is a need to strengthen investor education in Hong Kong, in view of increasingly complex financial products and services on offer by various types of financial institutions across the financial sectors. Consumers very often find themselves in a vulnerable position due to their incapability to properly understand the financial products or services they have purchased.
4. It is crucial that the proposed IEC should be able to enhance public understanding of different forms of financial products and services across the financial spectrum, and to keep pace with market development and effectively protect the interests of investors and consumers.
5. As to the proposed setting up of a dedicated IEC to oversee education work in respect of the entire financial sector, the Council considers it necessary for the IEC to work out the interaction with relevant parties which currently deliver investor education, with a view to avoiding duplication of efforts or missing gap in financial education work. Close communication between the IEC and relevant parties as well as financial regulators should be established.

Question 2:    Do you agree to the proposed scope of the IEC in paragraphs 2.2 ¡V 2.11 in the consultation document? Please provide reasons and suggest alternatives as appropriate.

6. While agreeing to the proposed scope of work (e.g. investor education programmes on the areas of choosing financial products, keeping track of finances etc), the Council believes that it is equally important for the IEC to build up a helpful and resourceful image so that the general public will go to it for information and advice on financial related matters.
7. In this respect, the Council is of the view that the IEC should be proactive in giving out timely and useful information, advice and view points on financial products and services to the general public. To establish closer communication with the public, the Council considers the set up of the various channels proposed should be user-friendly to deal effectively with public enquiries.

Question 3:    Do you agree that the IEC should take up and enhance the current investor education initiatives undertaken by the SFC, and on that basis broaden its remit to other forms of financial products and services regulated by the HKMA, OCI and MPFA as discussed in paragraph 2.3 the consultation document? Please explain.

8. It is understandable that the work of the IEC is proposed to be confined to a manageable scope initially by taking up the current investor education initiatives undertaken by the SFC and on that basis subsequently broadened to other forms of financial products and services regulated by the HKMA, OCI and MPFA. However, caution should be exercised to avoid public misconception that the scope of work of the IEC is primarily focusing on SFC-regulated products and services, or is limited to ¡§regulated¡¨ financial products and services.
9. As the scope of work of the IEC is to cover different forms of financial products and services in Hong Kong, the Council believes it is legitimate for the public to expect the IEC to provide information and advice on financial products and services offered by non-regulated financial providers such as some money lending companies (loan sharks) and debt collection agents, as well as non-regulated financial products such as London Gold, which may warrant even more attention.

Question 4:    Do you agree to the proposed phased development strategy of the IEC in paragraphs 2.12 and 2.13 the consultation document? Please explain.

10. Since the funding of the IEC is indirectly borne by the public (SFC is partly funded from levies on securities transactions paid by investors), the Council supports the proposed development strategies of the IEC to promulgate performance indicators and conduct surveys to track the impact of its investor education initiatives overtime.

Question 5:    Do you support that the IEC be set up as a company wholly owned and fully funded by the SFC?

11. The Council is of the view that as the IEC will deliver investor education initiatives covering the full spectrum of financial products and services, there may be concerns on whether this may prejudice the impartiality of the IEC if it is under the SFC. For instance, more resources may be allocated to promote public understanding of SFC-regulated products and services, and thereby causing unfair competition amongst the various types of financial products and services. Further, the public may suspect that the IEC, as a company owned and fully funded by the SFC, would lack the initiative to draw public attention to any pitfalls with SFC-regulated products and services.
12. The Council considers that setting up an independent statutory body, with funding from relevant financial regulators and the Government, may avoid potential prejudice to the impartiality of the IEC or the misconception that it will tilt towards SFC-regulated products and services if it is to be under the SFC.

Question 6:    Do you agree to the corporate governance and funding arrangements for the IEC in paragraph 3.4 the consultation document; and have any other views on the institutional set-up of the IEC? Please elaborate.

13. On the issue of governance, the Council is of the view that in line with the appointment mechanism adopted for many other statutory public bodies in Hong Kong, the appointment of the IEC Chairman and the Board Members should rest with the Government.
14. With regards to the composition of the Board of Directors, the Council sees a need to have lay person representing the interests of the general public to sit on the IEC Board, in addition to members from the relevant financial regulators, the Government and the financial service industry.
15. The Council is of the view that checks and balances and financial oversight measures should be introduced regardless of which institutional set-up is to be chosen.
16. Please refer to paragraph 12 for the Council¡¦s view on the institutional set-up of the IEC.

Part II - FDRC

Question 1:     Do you agree that we should strengthen the current channels for financial services providers and their consumers and investors to resolve monetary disputes relating to the provision of financial services?

17. The Council welcomes the proposed establishment of the FDRC to provide consumers with an additional channel to resolve their complaints relating to financial products and services. For the benefit and protection of consumer interests, the Council is of the view that the services to be provided by the FDRC should be effective, efficient but not costly.
18. As mentioned in the case of the IEC, the Council considers interaction amongst the FDRC, the financial regulators and relevant parties handling consumer complaints in relation to financial products and services should be worked out and the respective roles of each relevant party should be made clear to the public. This is to ensure the public will not be confused as to where to go for complaints, in particular when incidents involving large numbers of consumers arise (as in the Lehman Brothers' case).

Question 2:    Do you support the idea of putting in place a dispute resolution scheme for financial services by way of mediation and arbitration?

19. The Council considers that public education about mediation and arbitration services should be provided to ensure the public understand the respective rights and obligations (e.g. arbitration award is final and binding) under these two processes, if mediation and arbitration are to be adopted in the handling of consumer complaints against financial institutions.

Question 3:    Do you have any views on the scope of the financial dispute resolution scheme to be operated by the FDRC?

20. As regards eligibility for the services of the FDRC, the Council welcomes the scope of the financial dispute resolution scheme to cover individual consumer(s) or sole proprietor(s) bringing a complaint to the FDRC as long as they have obtained services provided by a regulated financial service provider in Hong Kong.
21. However, it is noted that the nature of complaints will be limited to those of monetary disputes and financial institutions subject to the scheme will be licensee or regulatee of the HKMA or the SFC. The Council is concerned if the proposed scope would provide adequate protection to consumers or meet their needs, considering that many of the complaints received by the Council are related to sales practice and service quality which are not necessarily linked to disputes of monetary nature to start with, or provided by financial service providers regulated by the HKMA or the SFC.
22. The Council does not consider the proposed carving out approach in protecting the interests of consumers could answer the needs of the public. The Council recommends that the scope of the financial dispute resolution scheme should be reviewed regularly to check on the appropriateness of its scope.

Question 4:    Do you have any views on the proposed process of the FDRC?

23. As in the case of the IEC, the Council considers that the whole process for the financial dispute resolution scheme should be made transparent and user-friendly to the general public. In addition, mediators and arbitrators engaged should be subject to professional code of conduct to ensure the credibility of the scheme.
24. It is of paramount importance for the proposed mediation and arbitration procedures, as well as the mediators and arbitrators involved, to be independent and impartial, as claimants (consumers) may not have adequate bargaining power or be able to make their request clear, and have to rely on a mediator or arbitrator to assist them to obtain compensation rightfully due to them.

Question 5:    Do you agree that to start with, financial services providers regulated by SFC and HKMA should be obligated to be members of the scheme to be operated by the FDRC? If not, please give reasons.

25. The Council supports requiring financial institutions regulated by the HKMA and the SFC to join as members of the proposed financial dispute resolution scheme. Membership should also be made open to other financial service providers who are interested in joining as members of the scheme.
26. Again, the Council reiterates its view that the scope of work of the FDRC should not be limited to ¡§regulated¡¨ financial products and services, i.e. products and services that are regulated by the HKMA or the SFC. In the long run, non-regulated products and services (e.g. investment products not requiring approval from SFC) and non-regulated financial services providers (e.g. money lenders) should also be included under the financial dispute resolution scheme.

Question 6:    Do you agree that a cap on the maximum claimable amount be imposed? If so, do you agree with the suggested level of HK$500,000?

27. The Council is of the view that the criteria (e.g. based on the average investment amount revealed in consumer investment surveys) and process adopted in arriving at a reasonable level, as well as the level of claimable amount, should be reviewed from time to time, to ensure its adequacy in protecting the interests of claimants.

Question 7:     Do you agree that an administrative fee of HK$100 be charged to consumers when they file a claim form?

28. There will be charges involved for cases proceeding to mediation and arbitration. The Council is of the view that the cost of filing of a complaint form with the FDRC should not pose an economic disincentive to discourage vulnerable consumers from making complaints in the first place.

Question 8:    Do you agree to the proposed fee schedule in paragraph 3.24 in the consultation document? Please give your views.

29. The proposed fee schedule could prove costly for consumers contemplating use of the mediation ($500 or $2000 depends on the amount of claim) and arbitration ($5000 per case) services of the FDRC. Considering that the current complaint handling services of the Council and the financial regulators are free of charge, it is important for the Government (and the FDRC when it is established) to explain to the public why and when a case fee will be charged, and the existence of a case fee refund policy (if any).
30. In any case, the Council is of the view that a case fee should only be charged, at affordable rate by the FDRC, and consideration should be given to refunding the case fee to a claimant if the complaint is substantiated.
31. The Council suggests that a fee waiver mechanism should be considered to waive the administrative fee and the case fee if a complainant cannot afford to pay.

Question 9:    Do you agree that the FDRC should regularly disclose summary data in relation to the cases it has handled without naming the relevant parties?

32. The Council supports making the work of the FDRC more transparent by regularly disclosing summary data in relation to the cases it has handled. The Council considers making public information on cases being screened out or not substantiated, and cases being referred for follow-up by relevant financial regulators, would help to establish the creditability of the FDRC.

Question 10:    Do you consider that the proposed roles of the FDRC and regulators are clearly delineated?

33. It is proposed that if the complaints are associated with alleged misconduct of the regulators¡¦ licensees or regulatees, those complaints should be made to the respective regulators, instead of to the FDRC. The Council is of the view that although this seems a clear separation of roles between the FDRC and the regulators ¡V for cases involving monetary disputes to go to the FDRC, and cases involving regulatory or systemic concerns to go to the relevant regulators, ordinary consumers may not find it easy to differentiate where to file their complaints as evident in the case of Lehman Brothers minibonds.
34. The Council would expect elaboration to be given to the public as to how the FDRC, as the first contact point for complaints in relation to financial products and services, can help to strengthen the existing complaint channels.

Question 11:    Do you agree that the FDRC should refer suspected systemic cases to the regulators and refrain from handling such cases upon referral?

35. As far as consumers are concerned, a ¡§one-stop service¡¨ to be provided by the FDRC in receiving and handling complaints on financial related matters regardless of whether the complaints are related to monetary disputes, or misconduct of financial service providers, or suspected systemic cases would help remove complainants¡¦ anxiety arising from being told to go to another party (e.g. financial regulator) to file their complaints. The public would expect referral and follow up actions (e.g. being informed about the process and outcome of the case or that the case has been referred) to be taken by the FDRC, instead of being left to decide whether to file their complaints with the FDRC or with relevant financial regulators.

Questions 14:    Do you agree to the proposed funding strategy for the financial industry in the long run?

36. The Council has no comments as to whether the funding responsibility of the FDRC should be ultimately taken up by the financial industry or the Government, but considers that the portion of the variable costs of the FDRC to be shared by claimants should be kept as minimal as possible, so as not to become an economic disincentive to consumers for lodging their complaints with the FDRC..

Question 16:    Do you have any views on the governance of the FDRC?

37. The Council welcomes the proposal that the Board of the FDRC would have representative equipped with knowledge of consumer protection.

Overall comments

38. While appreciating the proposed establishment of the IEC and the FDRC, the Council puts forward for the consideration of the FSTB whether it would be suitable to put the IEC and the FDRC under one roof. It would then be simpler and more direct (a really ¡§one-stop-service¡¨) for consumers to look for advice and to lodge their complaints. A single integrated organization may also be in a better position to understand consumer issues which in turn would be helpful in identifying areas for investor education.