- The Consumer Council (the Council) is pleased to submit views to the Hong Kong Deposit Protection Board (the Board) regarding the consultation on the Review of the Deposit Protection Scheme (DPS)
THE COUNCIL'S RESPONSE
Protection limit
- The Council is pleased to note that the Board has taken on board the Council's previous comment that the current protection level of the DPS is low in comparison to the level of deposit protection in major overseas countries, and is now recommending that the protection limit for the DPS be raised to $500,000. The Council fully supports the proposal of increasing the protection limit to $500,000 which can better protect depositor interests.
- Notwithstanding the increase proposed, the Council considers it important for the Board to keep reviewing the protection limit periodically to ensure it will remain effective in protecting the interest of depositors in Hong Kong.
Compensation calculation basis
- In its previous submission, the Council expressed support for partial netting for the reason that depositors will be better off if only contractually due and past due liabilities would be set off against the depositors' savings. Adopting a partial netting approach would help to mitigate the liquidity position of depositors and thus minimize their hardship due to a bank default and thereby conforming with the objective of the DPS to protect small depositors.
- However, the Board points out in the current consultation paper that under Hong Kong's insolvency law, mutual credits and debts between the insolvent entity and its creditors and debtors will be set off against each other in liquidations. As such, changing the netting approach for priority claims will amount to modifying the insolvency regime in Hong Kong and providing for better depositor preference. The Board therefore does not recommend changing the netting approach of the DPS for the time being.
- Given that changing the existing insolvency regime in Hong Kong is not likely to happen soon, the Council is of the view that the Board may consider gathering information on experiences of countries adopting partial netting (the US, Canada and Japan) to facilitate review when there is likelihood of changes in the future, for enhancing the level of depositor protection in Hong Kong.
Product coverage
- The Council, in its previous submission and in its Choice magazine, raised concern about the uncertainty regarding the treatment of structured deposits and secured deposits under the DPS. On the issue of secured deposits, the Council expressed concern that depositors who consent to collateralize credit line with money in their integrated banking accounts may not realize that the entire deposits in the accounts are unprotected under the DPS. Further, the use of the term "deposit" in structured deposit may be potentially problematic, and the Council suggested the treatment of structured deposits under the DPS should be kept under review.
- The Council therefore supports revising the definition of "deposit" in the Deposit Protection Scheme Ordinance (DPSO) and welcomes the Board's proposal of including secured deposits under the protection of the DPS. Nonetheless, it will be important for the Board to ensure banks' understanding of the revised definition when it is adopted, for them to name and market their financial products properly and advise their customers correctly, in particular on the protection status of their financial products.
- As regards the issue of structured deposits, the Council understands that part of the reasons for carving out structured deposits from the coverage of the DPS is ease of administration, as it is difficult to ascertain whether or not structured deposits fit in with the definition of deposit under the Banking Ordinance (as noted in the previous consultation).
- However, a recent study by the Council showed that it is confusing to the public as to whether or not some structured deposits are eligible for protection under the DPS. The study found that a few structured deposit products with features of fixed interest rate and early redemption option are in fact protected deposits.
- A financial product bearing the name "structured deposit" is therefore not necessarily unprotected. With banks varying in practice from one to another, the issue is a complex one to the ordinary depositors. It is vital for the Board to provide certainty to depositors regarding the status of structured products offered by banks. Considering the growing popularity of structured products amongst retail depositors, the Council believes that positive treatment of structured products is important to depositors.
- For clarity on the protection status of financial products in general, the Council considers it is necessary for the Board and the Hong Kong Monetary Authority (HKMA) to take a cautious approach to advise banks on the use of the term "deposit' in naming and marketing their banking or financial products. The Council urges the Board to put to rest any uncertainties and give consumers full confidence with their deposits for which the DPS is intended.
Types of institutions covered
- The Board does not recommend extending the coverage of the DPS to deposits held in restricted licence banks (RLB) and deposit-taking companies (DTC).
- Despite that the accessibility of ordinary retail depositors to RLBs and DTCs is generally very limited (0.5% of total customer deposits) as pointed out in the consultation paper, the Council notes that there are a couple of DTCs actively engaged in consumer finance which may warrant the Board's particular attention.
- From the point of fostering competition, allowing RLBs and DTCs to join the DPS would give confidence to consumers to deposit money with these institutions and thereby enhance their ability to compete with banks on access to lower cost of funding from retail customers.
- In a low interest environment, the Council believes that consumers in search of higher interest rates may switch their savings to these deposit takers. The Council reiterates its previous suggestion that the Board should continue to review the membership of the DPS, with a view to extending the coverage of the DPS to RLBs and DTCs should there be changes in the three-tier authorization system.
- It is pointed out in the consultation paper that small localised deposit takers (such as credit unions, savings associations, building societies and labour banks) are also covered by deposit protection schemes in many other countries. The Council suggests that the Board should review if institutions which allow deposit taking from small depositors but are not subject to the protection of the DPS would become an area of concern in the context of Hong Kong.
Funding arrangements
- To contain the cost impacts due to protecting secured deposits and raising the protection limit, the Board suggests taking some cost mitigating measures to alleviate burden on banks, thus reducing the potential for cost transfer to depositors.
- The Council has concerns on allowing banks to report on a "net deposit basis" instead of on a "gross deposit basis" for contribution assessment purposes, reducing the target fund size, and cutting contributing rates by half which will prolong the time required (from 2012 to 2016) for the DPS to reach its target.
- To prevent the potential cost transfer to depositors arising from the proposals of protecting secured deposits and raising the protection limit, the Council has no objection to the Board's proposed cost mitigation measures to alleviate the industry's financial burden.
- Nevertheless, the Council suggests the Board to explore if allowing banks to decide for themselves whether to report protected deposits for contribution assessment purpose on a net deposit basis or on a gross deposit basis would put some banks in a disadvantaged position as they may find the system enhancement cost of performing netting not proportionate to the savings to be obtained.
- The Council would like to know from the Board if any other countries adopt a net deposit basis for contribution assessment of deposit insurance, and whether any of them allows the industry choice of the report basis.
- Another point that the Council wishes to make relates to the proposed reduction of the target fund size and the related contribution rates. In considering any reduction of the target fund size and the contribution rates, the Council urges the Board to ensure that both are appropriately set and that the reduction will not materially affect the effectiveness of the DPS in light of the volatile economy condition in Hong Kong.
- It is remarked in the consultation paper that the Board has not noticed any reports of banks passing on the cost of deposit protection to depositors since the inception of the DPS. Although no direct charges in relation to deposit protection are imposed on depositors, the Council considers that the Board has a role to play in monitoring the situation upon increase of the protection limit.
Consequential amendments to the priority claims of depositors
- It is recommended in the consultation paper that the level of priority claims for depositors and the definition of deposit for the priority claims for depositors under the Companies Ordinance be brought in line with the DPS protection limit and the revised definition of deposit in the DPSO. The Council supports making these adjustments.
Other comments
- The Government Deposit Guarantee will expire by the end of 2010. The Council is concerned that the low-interest environment coupled with the aggressive marketing practices of some authorized institutions may cause more and more small depositors to be attracted to deposit their money with these institutions for higher interest rates, not realizing that their deposits would become unprotected if there is no extension of the Deposit Guarantee.
- The Council suggests that the Board should undertake publicity activities to promote and raise the general public's awareness of the time limit of the Deposit Guarantee. This can help to disseminate a clear alert message in good time for depositors to take appropriate action to secure their deposits if necessary.
- Further, it is important for the Board to work with the HKMA to monitor if there are any malpractices in the marketplace to deceive depositors into believing that the deposits they make are protected when in fact they are not.
