Panel on Financial Affairs (Papers) 5 Jan 98

Provisional Legislative Council

Financial Affairs Panel Meeting on 5 January 1998

Monitoring of the Loco London Gold Market

Introduction

This paper sets out the problem of fraudulence and deception activities in relation to trading on Loco London Gold and action taken in response by the government.

Bullion Trading in Hong Kong

2.Wholesale gold trading in Hong Kong is conducted mainly through the Chinese Gold and Silver Exchange Society ( " the Society " ) and the Loco London Gold market. The Society provides trading facilities and acts as a self-regulatory body for its 191 members.

The Loco London Gold Market

3.London is the world's major gold trading and settlement centre. The London gold market is a spot market with delivery of gold in London. Settlement may be deferred and leveraged trading is the norm. Each trading lot is 100 troy ounces and the fineness is usually 99.99%. In the present globalised financial market, trading in London gold virtually takes place round the clock and all over the world. Bid and ask prices are quoted on a continuous basis in commonly accessible financial market information system such as the Reuters. Apart from London, the other major trading centres for London gold include New York and Hong Kong, with Hong Kong being the trading centre in Asia. Trading is usually conducted at the wholesale level between major participants such as banks, major international bullion houses and gold trading companies.

4.The London gold market in Hong Kong is known as the Loco (Local) London gold market. As in the other two major London gold trading centres, there is no restriction on access to the market. Currently, the market has about 70 active trading parties, most of which are banks, investment companies and local gold traders, who trade on London gold to hedge against their positions in the future market. Orders are also received from the rest of the region and the other two centres outside their business hours. There is no official figure on the size of the London gold market in Hong Kong but according to a rough estimate from the market, the average daily turnover is around US$190 million, or about seven times that of the Chinese Gold and Silver Exchange Society.

Regulation of Loco London Gold Trading

5.There is no specific legislation to regulate bullion trading in Hong Kong. In more than eight decades, the Chinese Gold and Silver Exchange Society has been operating effectively on a self-regulatory basis and the status has been well recognised by both the local as well as international markets. The Loco London gold market was established in Hong Kong in mid 1970s and has been operating effectively since. As we understand it, trading on London gold is basically unregulated in most overseas markets including New York and London due to the fact that it is a highly sophisticated market among a group of seasoned and specialised traders and that trading is essentially at the wholesale level. We see no convincing reason to change the current practice.

Complaints

6.Complaints received in relation to trading in Loco London Gold do not actually pertain to genuine bullion trading or its systems and procedures. Typically, such complaints are in relation to recruitment advertised by companies which claim to be investment companies dealing in London gold. The positions are normally advertised as clerk or telephone order taker, and require little or no relevant knowledge or experience from the applicants. Soon after commencement of employment, the complainants would be lured into investing in London gold/silver. Some of them were persuaded to sign contracts authorising the companies full right to buy/sell on their behalf. In many cases, the complainants did not fully understand the nature of their investment activities and, within very short period of time, were told by the companies that they had lost their money or even became indebted to the companies. Some complainants believed the companies had conspired to defraud them.

Investor Education

7.Regulations for fraudulence and deception activities are already covered by laws enforced by the Police. Upon conviction, these cases are subject to criminal punishments. It is inappropriate to seek to regulate a bona fide trade, in this case the trading of London Gold, on grounds that cases of fraudulence and deception occurred in the guise of such trade. We believe that the best solution against fraud and deception lies in public education. In this regard, as job seekers (mostly new immigrants and summer-job students) appear to be the targeted victims, the Labour Department has periodically issued press release and distributed booklets to advise job seekers to be aware of various forms of jobs traps, including those in Loco London gold and other financial investments.

8.Following the meeting with the Financial Affairs Panel of the previous Legislative Council in July 1996, the Financial Services Bureau has also prepared a pamphlet listing out specifically the commonly seen fraudulent activities in relation to Loco London gold and silver trading. A copy of which is at Annex. The pamphlets are distributed at the District Offices of the Labour Department and the Home Affairs Department. Copies are also available at the Consumer Council counters and at Police stations. The Police have also highlighted complaints about bullion trading activities in its Police Call programmes. The relevant episodes will be replayed from time to time. There are also designated officers at the Financial Services Bureau, Labour Department and the Police to answer public enquiries about Loco London gold trading.

9.In summer 1997, we have taken a more pro-active approach to distribute the pamphlets to -

all secondary schools through Education Department. School authorities are invited to post the pamphlets on the notice boards and teachers have been asked to brief the students on the possible traps in Loco London gold trading in suitable occasions;
all Student Affairs Office of all tertiary institutions (e.g. universities, Vocational Training Council, Institute of Education, etc.) so that students can have access to the relevant information; and
all housing estates managed by the Housing Department. The pamphlets would be posted on the notice boards at the entrances of each building.

10.We will further enhance the distribution of information by -

seeking co-operation from non-government organisations serving new immigrants and/or youth to help distribute the pamphlets to their clients;
asking the District Offices, particular those in areas with higher concentration of new immigrants, to actively distribute the pamphlets to the new immigrants; and
asking the Immigrant Department to help distribute the pamphlets to the newly arrived immigrants at the border control points.

11.From a wider perspective, the Securities and Futures Commission have produced a series of TV programmes and brochures to educate the public the right way of doing investment, with emphasis on knowing more about the investment products and the risks involved, as well as the rights and obligations of signing investment contracts.

12.The education programme has proven to be effective so far. The number of telephone enquiries received by this Bureau has decreased. The Police has also received more complaints form the public, which reflect increasing public awareness of the fraudulent activities conducted in the name of London gold trading. Up to the middle of this month, investigation has been made into 37 complaints. So far, one conviction has been made by court.

13.The Administration will continue to work with all relevant bodies with a view to enhancing their understanding of the nature and risks of their investment, including the Loco London gold.

Financial Services Bureau
24 December 1997