LegCo Paper No. CB(1)1950/95-96
Ref : CB1/PL/TI/1 (These minutes have been seen by the Administration)

LegCo Panel on Trade and Industry

Minutes of Special Meeting
held on Tuesday, 18 June 1996 at 10:45 a.m.
in the Chamber of the Legislative Council Building

Members Present :

    Hon NGAI Shiu-kit, OBE, JP (Chairman)
    Hon Martin LEE Chu-ming, QC, JP
    Hon Henry TANG Ying-yen, JP
    Hon CHAN Kam-lam
    Hon SIN Chung-kai

Member Attending :

    Hon LI Wah-ming

Members Absent :

    Hon CHIM Pui-chung (Deputy Chairman)
    Dr Hon HUANG Chen-ya, MBE
    Dr Hon Philip WONG Yu-hong
    Hon Christine LOH Kung-wai
    Hon James TIEN Pei-chun, OBE, JP
    Hon Paul CHENG Ming-fun
    Hon LAU Hon-chuen, JP
    Dr Hon LAW Cheung-kwok

Public Officers Attending :

Item I
Mr Patrick NIP
Principal Assistant Secretary for Trade and Industry
Mr LEE Kam-chung
Registrar of Travel Agents

Item II
Mr Francis HO
Deputy Secretary for Trade and Industry

Staff in Attendance :

Miss Odelia LEUNG
CAS(1)1
Ms Sarah YUEN
SAS(1)1

I. Closure of Observers Travel Enterprises Co. Ltd.

(LegCo Paper No. CB(1)1636/95-96)

Mr Patrick NIP briefed members on the Administration’s paper on the closure of Observers Travel Enterprise Co. Ltd. (Observers Travel) and highlighted the following points :

  1. It was only in May 1996 that the Registrar of Travel Agents (the Registrar) was given to understand that Observers Travel had cash flow problems. The Registrar immediately required Observers Travel to submit to him for investigation its updated statements of accounts for the year ended February 1996. The accounts submitted in early June 1996 revealed that as at the end of February 1996, the travel agent had a shareholders’ deficit of over $8 million. When asked to provide further explanation, Observers Travel notified the Registrar on 8 June 1996 that it had decided to cease its business on the same day due to financial difficulties.
  2. The Registrar, in deciding the appropriate time to notify the public of financial difficulties of any travel agent, had to exercise great care as any premature announcement would have undue adverse impact on the travel agent’s business.

2. In reply to members’ questions on Observers Travel’s operation, Mr Patrick NIP and Mr LEE Kam-chung provided the following information:

  1. It was a normal business activity on the part of a travel agent to increase its paid-up capital. The Registrar hence had not required Observers Travel to explain such an increase from $3 million to $10 million in May 1995.
  2. Under the Travel Agents Ordinance, Cap.218 (TAO), an application for renewal of a travel agent licence should be made not more than two months and not less than one month prior to the expiry of the licence. In the case of Observers Travel, when its licence was renewed in February 1996, the travel agent submitted its statements of accounts for the year ended on 30 September 1995 which showed that it had a retained equity of some $5.5 million. The statements of accounts for the period between October 1995 and February 1996 were not available for inspection at the time when the travel agent applied for renewal of its licence.
  3. According to the two directors of Observers Travel who were required to appear before the Registrar on 12 June 1996 for the purpose of giving evidence in connection with the investigation, the travel agent suffered heavy losses in recent months. This was partly attributed to a significant drop in, its main businesses, i.e. outbound tours to Japan and South Korea, in 1995 because of the Kobe earthquake in Japan and other domestic problems that plagued the two countries.
  4. The Registrar had appointed an auditor to audit the books of Observers Travel as part and parcel of the investigation. Further action would be contemplated should any fraud be uncovered.

3. Members opined that Observers Travel incident called for a review on the existing regulatory mechanism of the travel industry. In this connection, some members queried the adequacy of the existing legislation. They criticised the absence of consumer representation in the Travel Industry Council of Hong Kong (TIC) and the lack of control over its work. These members were of the view that instead of relying on self-regulation of travel agents, the Travel Agents Registry (the Registry) might need to strengthen its establishment and enhance its monitoring role.

4. In response, Mr NIP and Mr LEE made the following points:

  1. All along the regulation of travel agents was undertaken through the mutually complementary work of the TIC and the Registry. Travel agents had to satisfy and comply with the conditions stipulated in the TAO for the issue and renewal of licences. In addition, codes of conduct were drawn up by the TIC for the regulation of travel agents. This system had been working effectively over the years. Since the establishment of the TIC, there were just a few cases of closure of travel agents.
  2. The Registrar, in carrying out his financial surveillance and character-checking duties, had to act in accordance with the provisions of the TAO. Before revoking a travel agent licence, the law required that the concerned travel agent should be given an opportunity to make representation. This was an essential check-and-balance on the Registrar’s power. As a matter of fact, before the Observers Travel incident, the Registrar had implemented a new measure regarding the submission of financial statements. Starting from April 1996, the Registrar might, where necessary, require a travel agent to submit a quarterly return on the financial position of its business accounts. It should be noted that as the Registry was operated under the principle of cost recovery, the costs of any additional manpower resources would have to be absorbed by an increase in travel agent licence fees.
  3. Four independent professionals were sitting on the Boards of Directors of the TIC. The existing TAO already empowered the Government to monitor the operation and the resource management of the TIC.
  4. In the light of the experience of the incident, the Administration would review the regulatory mechanism in respect of travel agents. It would consider the various views and suggestions put forward since the incident and seek the advice of the Advisory Committee on Travel Agents and the Travel Industry Compensation Fund (TICF) Management Board on possible ways to further strengthen the regulatory regime.

5. Concerning the ex gratia compensation from the TICF, some members opined that as the total accumulated reserve of the TICF, as at the end of May 1996, had reached $200 million, it was high time to review both the scope of and the rate of compensation under the Fund. Some members suggested to extend its scope to cover fares paid in respect of air passage and hotel accommodation and to raise the rate of ex gratia payment from 80% to 100% of the tour fares. Other members, however, opined that the proposal to raise the rate of ex gratia payment to 100% should be carefully assessed. They pointed out that such a proposal might have a possible demerit since consumers might not exercise as much care as they used to in selecting travel agents.

6. In response, Mr NIP made the following points:

  1. The Administration would review the rate of ex gratia payment together with the regulatory mechanism of licensed travel agents. The industry had expressed worries that should the rate of compensation be raised to 100% of the tour fares, it might lead to unhealthy price competition as the financial soundness of a travel agent would no longer be a factor considered by consumers in selecting travel agents. Nevertheless, the Administration was open-minded on the matter and would consider different views carefully before making any decision.
  2. In the Observers Travel case, the affected clients could present their franked receipts to the TIC to obtain a voucher for 80% of the fare paid. They could use the voucher within two weeks from 12 June 1996 for package tours to Asia, Europe or the United States at a 20 % discount in tour fares voluntarily offered by a group of travel agents. If the affected clients chose to join these discounted package tours, they would in effect suffer no financial loss.
  1. Of the 772 outbound travellers affected by the closure of Observers Travel, only two cases involved flight or hotel bookings. In accordance with existing trade practice, travellers would have the security of air tickets or hotel vouchers in their hands on full payment of fares in such transactions. Upon defaults of travel agents concerned travellers would not be directly affected. Nevertheless, the Administration would give due consideration to members’ suggestion to expand the scope of the TICF to cover the provision of these services.
Admin

7. Some members were of the view that the trade’s worries about price wars were unwarranted as the variation in price should only reflect the quality of service. They also had reservation about the current practice of setting the minimal tour fares by the TIC for its members. Members agreed that the Administration should report at the next Panel meeting the progress of its review on the regulatory mechanism, and the TIC be invited to attend the meeting.

Admin
Clerk

II. Any Other Business

8. With the consent of the Chairman, Mr Francis HO briefed members on the recent additional import document requirements imposed by the United States on certain Hong Kong textile products. Mr HO said that allegedly on the ground of tackling illegal textiles transshipment, the US Customs announced on 13 June 1996 its decision to impose new measures on ten categories of clothing from Hong Kong with effect from 17 June 1996. Under the new requirements, importers of these products from Hong Kong were required to submit, for each consignment, declarations completed and signed by all manufacturers and subcontractors involved in the production of the consignment. The importers also had to certify that the declarations were accurate, and to pay higher entry bonds. The requirements provided that if a US textile production verification team was in Hong Kong, the consignment would be detained until the team verified that production had actually taken place in Hong Kong. The new measures would affect $3.5 billion of Hong Kong goods, or about 4% of textile and clothing exports to the world.

9. Mr HO explained that the US move was unreasonable in that Hong Kong was given no time to prepare for this new arrangement. In fact, the Director-General of Trade discussed the transshipment problem with the US Customs officials on 12 June 1996 but had not been informed of the US action. The US imposed the discriminatory measures against Hong Kong unilaterally without any prior discussions with the Hong Kong Government to seek to establish the facts about the perceived problems of transshipment in Hong Kong. Textiles products on their way to US would be unlikely to meet the new requirements. The new measures would jeopardise Hong Kong’s competitiveness since they were applied only to Hong Kong. Hong Kong’s economy would inevitably suffer if US buyers placed orders elsewhere consequent to these new requirements. The Administration was worried that the new measures might be just the beginning of the upcoming US actions to protect its trade.

10. Mr HO also outlined the actions taken by the Administration in response to the new measures as follows:

  1. As soon as the news was communicated to the Administration on 13 June 1996 by the Deputy Commissioner of US Customs who was in Hong Kong, a protest was made to him immediately against this unilateral move. The Hong Kong Government would examine whether the US had violated the multi-lateral trade obligations under the World Trade Organisation.
  2. Upon receipt of the formal notice from the US on 14 June 1996, the Secretary for Trade and Industry had written to the Commissioner of US Customs requesting him to reconsider and to rescind the new measures. The US side agreed to conduct talks with Hong Kong as soon as possible and guaranteed that they would try their best to prevent the new measures from disrupting the legitimate trade.
  3. The Director-General of Trade, in his trip to the US, called on the Commissioner of US Customs on 14 June 1996 and reiterated the Hong Kong Government’s request to rescind or at least to delay the implementation of the new measures.
  4. The Administration had notified the local textile industry of the US action. The Textile Advisory Board would hold an emergency meeting on 18 June 1996 to discuss the matter.

11. Members expressed strong objection to the unilateral move of the US. They criticised the US Government for hastily implementing the new measures without any consultation with the Hong Kong Government. One member opined that the Hong Kong Government should review its trade relations with the US and take a more proactive approach to ensure that Hong Kong was treated as a trading partner on equal footing.

12. In conclusion, the Chairman said that the Panel was highly disappointed and dissatisfied with the US unilateral action. The Panel urged the Administration to take expeditious actions to negotiate with the US to resolve the matter satisfactorily.

13. The meeting ended at noon.

LegCo Secretariat
9 August 1996

Last Updated on 21 Aug, 1998