Consumer Council’s Views on Guideline on Authorization of Virtual Banks

15 March 2018
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1.       The Consumer Council (the Council) is pleased to provide its views to the Hong Kong Monetary Authority (HKMA) on the public consultation of the revised Guideline on Authorization of Virtual Banks (Guideline).  The Council welcomes the revision of the Guideline which can on the one hand, facilitate and encourage the establishment of virtual banks, and on the other hand, enhance the protection to consumers in Hong Kong.

2.       Amongst the refinements, the Council appreciates the new principle of promoting financial inclusion in the revised Guideline that virtual banks should not impose any minimum account balance requirement or low-balance fees on their customers, and the new requirement that the board of directors and senior management of virtual banks should have the requisite knowledge and experience in virtual bank operations.  The Council is of the view that as the setup cost of a virtual bank is substantially smaller than a brick and mortar bank, unless the service provider would like to practice cream skimming high-end customers, there should not be any minimum account balance requirement.  Members of the general public, regardless of their economic status, should be able to enjoy the benefits of financial technology (fintech) and innovation, in terms of fairness, convenience and easy access of banking services.  At the same time, the Council considers that requisite knowledge and experience in virtual bank operations would be critical given that they are of new technology-driven business nature and model.

3.       The revised Guideline requires virtual banks to set out clearly in its terms and conditions the respective rights and obligations between the bank and its customers.  As transactions and interactions of virtual banks are basically online and technology-based, the Council suggests that the principle of user-friendliness and ease of understanding on the terms and conditions is important too.

4.       The Council would also like to comment on the principle on (i) exit plan; (ii) physical presence; (iii) technology risk; (iv) virtual banking versus peer-to-peer platform; and (v) consideration on competition.

Exit plan

5.       The Council also welcomes the new principle of requiring virtual banks to provide an exit plan in advance so that in case they are unable to sustain their business, they can leave the market in an orderly manner and minimize the disruption and loss to consumers and society.  The Council considers that this measure would enhance consumer confidence of switching to or engaging in the use of virtual banking services.  However, the Council would also like to seek clarification whether there would have any requirements on the virtual banks and their counter-parties involved for ensuring that the exit plan would be properly implemented when necessary, for instance, other institutions may take over the business operations of the exit virtual banks to minimize disruption to the affected account holders.

Physical presence

6.       As identified in the Council's Online Retail Study in November 2016, there was a lack of transparency about online traders’geographic locations which can cause problem of inconvenience for consumer enquiries and disputes.  The Council therefore considers the requirement that virtual bank operators who will engage in local retail business must maintain a physical presence in Hong Kong to provide a point of contact for customers to make enquiries or complaints and supervision from HKMA is deemed necessary in the interest of consumers.  Besides, a physical presence in Hong Kong that allows the virtual banking operator to rapidly response to enquiries to any possible phishing of its operation in the Internet environment that necessary minimizes any possible consumer detriment.   

Technology risk

7.       The Council appreciates that an independent assessment report on computer hardware, systems, security, procedures and controls would be provided to the HKMA for consideration of an application and that virtual banks should also establish procedures for regular review of its security and technology related arrangements.  For enhancement of information transparency and security safeguards, the Council suggests that for any major incidents happened in relation to system and security breaches, they should be reported timely to the HKMA and disclosed to the public where appropriate.

Virtual banking vs peer-to-peer platform

8.       Closely related to the emergence of new business model in the financial market, the Council observed that there are some online peer-to-peer lending platforms in Hong Kong which are non-regulated under any financial or banking regulations but offer “investment opportunity” by accepting money from consumers (regardless of whether it is through a third party in trust or as from professional investors) and provide interest in return.  From the perspective of consumers, the operations of these platforms, to a certain extent are similar to ordinary banks with deposits taken from individuals and interests be gained through making loans to various parties.  For the sake of consumer protection, the Council considers it warrant for the HKMA and other financial regulators to closely monitor the development of the online peer-to-peer lending operation in the marketplace, so as to ensure that there may not be any regulatory arbitrage or gap to the detriment of consumer interests.

Consideration on competition

9.       From the Council's Online Retail Study in 2016, despite the propensity to switch between online and on-street was differed by age, diversity and frequency of online shopping, once a person is an experienced online shopper in several sectors, the chance of switching to online in other sectors is higher even with a small price saving.  Assuming this observation applies to banking services, the Council considers that the HKMA would have to examine the underlying cost structure and price setting between the two modes of banking services, so as to impose fair and transparent regulatory requirements to enable a healthy competition in the marketplace, together with the interests of consumers could be well protected.

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