Submission to Hong Kong Deposit Protection Board Treatment of Structured Products under the Deposit Protection Scheme

1. The Consumer Council is pleased to submit its views to the Hong Kong Deposit Protection Board (the Board) on the proposed amendments to be made to the Deposit Protection Scheme (DPS) Ordinance regarding the treatment of structured products under the DPS. 
2. The matter of concern is whether structured products (or more commonly known as structured deposits) offered by a significant number of Scheme members should be regarded as "deposits" and thus protected by the DPS. Two options are proposed in the consultation paper in an attempt to resolve the uncertainty regarding the treatment of structured products. They are
   1. Option 1: Exclusion of principal linked structured products
   2. Option 2: Exclusion of all structured products (i.e. to exclude both principal and interest linked structured products)

COUNCIL RESPONSE

3. The Council supports, in principle, the Board providing certainty to depositors regarding the status of structured products offered by Scheme members. The Council agrees that a clearer treatment of structured products is important to depositors. Whether a structured product is or is not protected by the DPS may affect customers' consideration of whether the product is a suitable investment. 
4. The Council's specific responses to the proposed amendments by the Board are set out below.

Use of the Term "DEPOSIT"

5. Before commenting on the two options proposed in the consultation paper, the Council would like to raise a fundamental concern as to whether it is appropriate for Scheme members to refer to or market a financial product as " DEPOSIT " to their customers when the product may not fall, in whole or in part, within the meaning of section 2(1) of the Banking Ordinance and thereby is not protected by the DPS. 
6. Considering the wide range of choices and the complex nature of deposit products offered by Scheme members in the marketplace, the Council considers it is necessary to ensure consumers would not be confused into believing a non-deposit product is protected under the DPS. To avoid any dispute arising from such confusion, the Council is of the view that Scheme members should refrain from referring to or marketing their financial products as deposit products in the first place if they have doubts or difficulty in correctly advising their customers whether the products are protected under the DPS. 

Option 1 or Option 2

7. Nevertheless, the aforesaid comment does not imply that the Council opts for Option 2, i.e. exclusion of ALL structured products from the DPS protection, for clarity to consumers regarding the treatment of structured products.
8. The Council understands that the policy objective of the DPS is to protect small depositors. Proponents for Option 2 may hold the view that depositors who opt for structured products typically hold deposits well in excess of the protection threshold of $100,000. Therefore, the exclusion of all structured products from DPS (Option 2) is not likely to undermine the effectiveness of the DPS at the current moment. Option 2 is also simple and clear.
9. However, the Council is concerned that with the aggressive marketing practices of banks, it is likely that the cost of entry for structured products will be lowered further from the current $100,000 in order to attract more and more small depositors to opt for potentially higher return structured products. There are already structured products with minimum investment amount of only $50,000. Option 2 will exclude such depositors altogether and the effectiveness of the DPS will be undermined in a decreased cost of entry scenario. The Council therefore thinks that Option 1 will give better protection to depositors. 
10. The Council's view is that it is very much an immediate ease of administration (Option 2) versus a cautious presentation of protection for the longer term (Option 1). The Council finds Option 1 preferable.
11. The Council also considers that for interest linked structured products, if the principal is repayable to customers in full and only the amount of interest to be repaid is linked to the performance of a financial asset or the occurrence of a specified event, such products should constitute deposits under the Banking Ordinance and be given DPS protection. It is in the interests of consumers to include the products under the DPS as their exclusion may discourage consumers or limit access to an alternative investment choice for a potentially higher return compared to traditional deposit products.
12. Considering the growing popularity and the decrease in cost of entry for structured products, the Council is of the view that interest linked structured products should be covered by the DPS, provided that there is a clear distinction made by Scheme members and explained to customers between interest linked structured products and other types of structured products. 
13. If principal linked structured products would not be covered under the DPS, the Council is of the view that Scheme members should not refer to or term the products as "deposits" to their customers (in addition to complying with the requirements of making a negative disclosure and obtaining the customer's acknowledgement at a later stage), so as to avoid any possible confusion associated with use of the term "deposit" and a misconception about DPS protection.

Review

14. No matter which option is finally adopted, the Council supports that the Board should conduct regular review taking into account market development (e.g. changes in consumers' investment behavior and the choices of financial products available in the financial market) so as to ensure the types of deposits covered by the DPS is appropriate and the exclusion of financial products will not materially affect the effectiveness of the DPS.