The Clearing and Settlement Systems (Amendment) Bill 2015, recently tabled before the Hong Kong Legislative Council, seeks to introduce and consolidate the regulation of stored value facilities ("SVFs") and retail payment systems ("RPSs") by amending the Clearing and Settlement Systems Ordinance ("CSSO"). If passed by the Legislative Council, the bill will introduce a new licensing regime for multi-purpose SVFs, extend the current designation for the regulation system under the CSSO to RPSs, and give the HKMA greater powers of oversight, investigation, and supervision of both RPSs and multi-purpose SVFs. As a result of the amendments, the CSSO will be renamed the Payment Systems and Stored Value Facilities Ordinance. The Hong Kong Government hopes that the introduction of these regulations will mean better protection of consumers as well as the financial system of Hong Kong.
Currently in Hong Kong, regulation of SVFs and RPSs extends only to the following:-
a) SVFs which are device-based and multi-purpose (multi-purpose in the sense that the regulated SVF must be used to purchase goods and services from both the issuer of the SFV and other third parties, an example of which is the Octopus Card) issued by authorized institutions only, under the Banking Ordinance (Cap. 155), and
b) large-value clearing and settlement systems (dealing with the clearing and settlement of interbank funds) under Clearing and Settlement Systems Ordinance (Cap. 584).
The current regulations, however, do not cover non-device-based SVFs, and do not cover payment systems undesignated by the HKMA as they are smaller in size, value and risk to the Hong Kong economy.
Under the bill, a licensing regime will be introduced into Hong Kong for SVFs, covering device-based multi-purpose SVFs (such as the Octopus card) and non-device-based multi-purpose SVFs. No person will be permitted to issue multi-purpose SVFs in Hong Kong unless they have obtained a licence from the HKMA.
Some SVFs will be exempt from registration. As with the current system, the new regulations will not cover single-purpose SVFs, such as prepaid and gift cards with retailers, as these are effectively bilateral contractual arrangements. The Government considers that they are of very little risk to the stability of the financial system due to the low degree of ‘moneyness’ (Clause 6 of the bill, introducing the new section 2A of the Ordinance). Clause 17 of the bill, inserting Part 2A, Division 8, and Clause 53 of the bill, inserting Schedule 8 into the ordinance, introduces other exemptions for situations where the SVF will be of a limited usage, such as where the SVF can only be used within certain premises, or at a single online store. Loyalty or frequent flyer schemes, which provide SVFs that enable payments to be made for goods and services of the issuer of the SVF or other persons under such schemes without the transfer of money (using, for example, accumulated reward points or requiring only a small contribution of cash, together with points), will also be exempt from the regulations. Finally, the HKMA will retain power to exempt an SVF at its own discretion after considering factors such as the impact of the SVF in Hong Kong such as risk to the user and economic health of Hong Kong.
As with existing legislation, licensed banks will be permitted to issue SVFs as a line of their business without having to apply for a new license, as their SVFs will be deemed to be licensed (Clause 17 of the Bill, introducing the new section 8G).
Clause 53 of the bill, introducing the new Schedule 3, outlines the minimum criteria for the grant of an SVF license. The applicant company must meet the following criteria from Schedule 3:-
a) principal business must be that of issuing and facilitating the issue of SVFs,
b) minimum of HK$25 million in paid-up capital,
c) management (chief executives, directors, and controllers) must all be fit and proper persons and have the systems of control to ensure this stays the case,
d) the same officers of the company responsible for the SVF business must have the appropriate knowledge and experience to discharge their responsibilities and have the systems of control to ensure this stays the case,
e) appropriate risk management policies and procedures for managing risks from its SVF business,
f) anti-money laundering measures which comply with Hong Kong laws and requirements on money laundering,
g) if the money from the SVF scheme (the 'float') is held by the applicant,
i) there must be policies in place to manage the float including separating the float from any other funds the applicant might receive,
ii) a user's stored amount in the SVF must be redeemable upon request, and any fees and deadlines for redeeming the user's amount must be clearly stated in the contract with the user,
h) prudent and sound SVF scheme, including operating rules for the scheme, having regard to the purpose of the scheme, and how it is to be operated.
The HKMA may attach conditions to any licence, including imposing restrictions on issuance and requirements on the management of the funds (Clause 17 of the bill, introducing new sections 8I to 8L). The licensed company must also satisfy certain obligations, including ensuring that the issuing and operation of SVFs are done in a safe and efficient manner, fulfilment of the minimum criteria, and notifying the HKMA of any changes in the licensee (Clause 17 of the bill, introducing the new sections 8M to 8T). These obligations were already in existence under the Code of Practice for Multi-purpose Stored Value Card Operation, as well as forming part of the statutory regime under the Banking Ordinance for the issue of multi-purpose stored value cards, but the bill seeks to consolidate them into statute and apply them across all multi-purpose SVFs.
The bill adopts the current system dealing with large-value clearing and settlement systems, and allows the HKMA to designate RPSs for regulation where the HKMA considers it necessary to do so.
Under the bill, an RPS will be designated for regulation by the HKMA if the HKMA considers that a disruption in the RPS will result in any one of the following “matters of significant public interest” (outlined in Clause 10 of the bill, introducing the new section 4(3A)):-
a) monetary or financial instability, or the functioning of Hong Kong as an international financial centre being adversely affected,
b) the confidence of the public in payment systems or the financial system of Hong Kong being adversely affected,
c) the day-to-day commercial activities in Hong Kong being adversely and materially affected.
The last two of the above are new.
The relevant factors which the HKMA will consider when deciding if a system should be designated are outlined in Clause 10 of the bill, introducing new section 4(4A) into the ordinance, and include:-
a) the estimated aggregate value of the transfer orders transferred in a day,
b) the estimated average value of the transfer orders involved,
c) the estimated number of transfer orders,
d) the estimated number of participants,
e) whether the system is already linked to another designated system or any clearing and settlement system that is or is operated by a clearing house (as recognised under section 37(1) of the Securities and Futures Ordinance (Cap. 571)).
4. HKMA's Role and Powers
Under the bill, the HKMA will be granted powers of supervision and enforcement over SVFs and designated RPSs. These supervisory powers include giving directions and/or appointing a manager or advisor to the management of SVF licensees (Clause 17 of the bill, introducing new Part 2A, Division 6, subdivision 2), imposing restrictions on the shares of the licensee (Clause 17 of the bill, introducing the new Part 2A, Division 7, subdivision 4), conducting examinations and investigations of the licensee or designated system to ensure compliance with the regulations (Clause 29 of the bill, introducing the new Part 3A), and issuing guidelines (Clause 45 of the bill, introducing the new section 54).
On top of extending existing criminal sanctions currently in place from the Banking Ordinance and the Clearing and Settlement Systems Ordinance, the bill will introduce civil sanctions for contraventions of the requirements, obligations, and provisions of the CSSO (Clause 29 of the bill, introducing the new Part 3B). These sanctions will range from warnings to suspension or revocation of a licence, as well as pecuniary penalties up to HK$10million or three times the profit gained or loss avoided as a result of the contravention.
The bill was gazetted on 23 January 2015, with the date of first reading scheduled for 4 February 2015. If passed, the Government plans to implement the new ordinance in two stages. On its gazettal, the provisions concerning applications for SVF licences, and the designation scheme for RPSs, will come into operation. A year after the commencement, the provisions on the offices stemming from the licensing regime of SVFs will begin operation. The transitional period of one year is to allow both existing and potential SVF issuers time to apply for licenses, with existing SVF issuers permitted to continue their operations provided that they apply for a licence within the transition period.
6. Possible effects
In the previous regime, payment cards (including credit cards) were subject to voluntary regulation under the Code of Practice for Payment Card Scheme Operators. That Code came into existence as a result of the HKMA deciding not to designate the schemes for regulation under the Clearing and Settlement Systems Ordinance and instead encouraging self-regulation by the scheme operators.
The Code's preface noted that the payment card schemes were not designated under the then existing legislation because they carried very little / no systemic risk to the financial system of Hong Kong. The new regime will expand on the schemes and systems which the HKMA can designate for regulation to cover retail payment systems, which means that credit card schemes may now be designated.
In the consultation conclusions it was explained that while the new regime may potentially result in credit card systems being designated, this will only be the case if the HKMA believes a disruption in a system would result in any one of the “matters of significant public interest” occurring based on a consideration of the factors outlined above.
We cannot definitively say if credit cards will be designated under the new ordinance should the bill be passed. However, the consultation conclusions do point to the fact that the Government has it in mind to include credit card systems within the definition of retail payment systems and bring them within the coverage of the designation regime. Although the final say rests with the HKMA, an argument can be made that any disruption in a credit card system may result in either a dent in the public's confidence in payment systems, or a material adverse effect on day-to-day commercial activity in Hong Kong, and it seems probable that credit card systems may be brought within the new regime. Having said that, we are not aware of any occasion when a credit card payment system has been disrupted in the past.
As regards SVFs, we know for certain what the new regulations will not apply to, as there are express exemptions in the bill. For example, facilities and schemes which cover only a limited number of goods or stores, loyalty points schemes which involve limited users' cash elements, and "online wallets" for single online retail platforms will not be covered by the new regime. An example of where an SVF would be covered is an online wallet facility which allows spending on any online retailer. Such a facility would be classified as a non-device based multi-purpose SVF.