LegCo Paper No. CB(1) 487/96-97(04)

Responses to members’ concern raised at the meeting on 8 November 1996

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Qtn (a) On the proposed restriction on the usage of cards issued by non-bank entities, members generally consider it prudent to take into account the consumers’ interest that the proposed regulation should not stifle market development or lead to monopoly of the market by licensed banks or large corporations. In this respect, the Consumer Council has also expressed concern that the approving authority should guard against anti-competition conditions set by the issuing institutions.

Ans (a) As we have set out our position in the Bills Committee meeting held on 15 October 1996, the competition issue could not be dealt with in the context of the Banking (Amendment) Bill 1996 as it is outside the scope of the Banking Ordinance. You are also aware that the Consumer Council has only recently published a report on "Competition Policy" which the Administration as a whole would formally respond in six months’ time. Where competition issues involving the issue of stored value cards are concerned, as verbally agreed with the Chairman of the Bills Committee, we are prepared to indicated in the speech for the resumption of the Second Reading debate our support for healthy competition and discouragement for unreasonable anti-competitive practices. Furthermore, the Hong Kong Monetary Authority will formally bring this to the attention of the banking industry.

Qtn (b) It appears that the creation of false electronic value (without using it) does not constitute an offence under the existing legislation. In view of the gap in legislation, is it possible to create an offence on counterfeiting electronic money under the Banking Ordinance or other legislation ?

Ans (b) The Bills Committee has requested us to clarify whether the act of counterfeiting electronic value might amount to an offence under existing ordinances. Members also suggested that we should check if those offences applicable to credit card fraud are also relevant. The paper attached to this letter has addressed this issue. (i.e. LegCo Paper No. CB(1) 487/96-97(03))

Qtn (c) On the protection of card-holders who have paid deposits for the issue of multi-purpose cards, is it possible to require the issuers to place all such deposits in a separate trust account so that in the event of bankruptcy of the issuer, the card-holders will be guaranteed return of the deposits paid ?

Ans (c) Our position on separate trust account was covered by our previous paper commenting on the Consumer Council submission, which was discussed at the meeting on 15 October 1996. We consider that it would be difficult to justify the proposal at this stage because -

1. in the case of cards where the value is originated and issued by the bank itself (as with the Visa scheme), the effect is simply to cause a shift from one liability of the bank (e.g. demand deposits) to another (liability for stored value). Given that demand deposits are not given trust account protection, we see no reason to afford this to electronic value. If the creditworthiness and balance sheet of the bank is considered sufficient to support deposits, it should be sufficient to support electronic value;
2. in the case of the Mondex-type scheme, all the electronic value is originated by one entity. Because of this, there is more justification for a trust account approach. But our thinking is that in the early stages at least, it will be sufficient for the originator to be a special purpose vehicle (thus with only a limited number of other creditors with potential claims on its assets) and for the assets to consist of Exchange Fund paper or deposits with the Exchange Fund. This will eliminate credit risk, leaving a limited amount of market risk on the assets (which would not be eliminated by a trust account) to be protected by the capital ratio requirement;
3. non-bank issuers of multi-purpose cards would similarly be required to set up special purpose vehicles. They would not be allowed to engage in the taking of deposits from the public or lending activities. This means that there would not be any other major creditors who would have a claim on the vehicle’s assets.

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