III Enhancements to the Deposit Protection Scheme
The degree of depositor protection provided by protection limit
Reflecting the proposal put forward by small and medium-sized banks, including retail and virtual banks, that the protection limit of DPS should be increased to $1 million, which was higher than the HK$800,000 recommended by HKDPB, members urged the Administration to give more consideration to the views of small and medium-sized banks in its future review of DPS. Members noted that if the protection limit was set at HK$800,000, the percentage of fully-protected depositors would be raised to 92.2%, whereas the percentage of total protected deposits was only 25.2%, far lower than the 67%-79% in other countries. Members suggested reviewing DPS more regularly in future and consider using the percentage of total protected deposits as one of the key indicators for determining the protection limit.
The Administration advised that it would proactively consider conducting another review of DPS three years after the new protection limit was put in effect. HKDPB undertook to give more consideration to the views of small and medium-sized banks in its future DPS review. On using the percentage of total protected deposits as one of the key indicators, HKDPB responded that as Hong Kong was an international financial centre, there were many high-end and corporate customers who placed large deposits into their accounts. As such, the effect of an increase in the protection limit on raising the percentage of total protected deposits was not significant compared with raising the number of fully-protected depositors. HKDPB would explore whether there were other key indicators for deposit protection applicable to an international financial centre, from which reference could be drawn.
Given that Hong Kong maintained a robust banking system under stringent supervision, and there had been no bank failure nor the need to use the DPS Fund since the launch of DPS in 2006, members suggested the Administration consider amending the computation of the levy to alleviate the burden of operating expenses on the banking industry; for instance, refraining from charging Scheme members levy when the total protected deposits reached a certain level, allowing Scheme members to make contributions based on the expected loss levy rates, which were lower than the build-up levy rates; or trying to reach the target fund size with the use of the investment gains of the DPS Fund, instead of rushing to reach the target size of HK$8.2 billion within three years.
The Administration and HKDPB took note of members’ suggestions. HKDPB pointed out that the level of DPS levy was already among the lowest in the world, and there was little room for further downward adjustment. If Scheme members were charged the expected loss levy, the time required for reaching the target fund size was expected to exceed 10 years. As this estimation was based on the current balance sheets of banks, which did not take into account the future development of the banking industry, the actual time required for reaching the target fund size could be even longer. Moreover, the results of a recent assessment conducted by the International Monetary Fund on Hong Kong’s financial sector also recommended to reach the target fund size of DPS as early as possible. Hence, it was crucial for DPS to achieve the target fund size within a short period as it would have an impact on the credibility of DPS.
IV Regulation of Virtual Asset Trading Platforms
Handling of a suspected fraud case involving a virtual asset trading platform
Regarding the recent suspected fraud case involving a VATP which attracted much attention in the community, Members expressed grave concern that notwithstanding SFC’s move to place the VATP concerned on its Alert List in July 2022, it failed to alert investors to avoid losses in a timely manner as SFC only issued a public warning statement naming the VATP and referred the case to the Police for follow-up after more than 14 months. Opining that law enforcement agencies should step up efforts in collecting intelligence and combating fraudulent conducts, Members suggested that SFC should notify law enforcement agencies as soon as possible when dealing with similar cases in future. SFC should also consider drawing reference from overseas practices and announce, within 24 hours after detection of individual suspicious websites, the investigation results thereon. In this connection, the Government should also consider enacting legislation to empower law enforcement agencies to duly handle or even shut down suspicious websites immediately with a view to enhancing investor protection.
SFC advised that in respect of the case which was of concern to Members, shortly after SFC’s attention was drawn to the making of suspected misleading online representations by the VATP concerned in 2022, SFC had placed it on the Alert List. Since then, SFC issued investor alerts on multiple occasions, on an anonymous basis, against dealing with unlicensed platforms and related malpractices. SFC received the first investor complaint against the VATP concerned in April 2023 and had since June 2023, by virtue of the enhanced investigative power conferred by the licensing regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”), collected more evidence of suspected fraud relating to the subject VATP, culminating in the decision to publish the relevant information on 13 September 2023. SFC stressed that while it had all along shared information with the Police on suspicious activities of and breaches by VATPs (including the VATP concerned), a joint working group had been set up with the Hong Kong Police Force to enhance the exchange of intelligence in future.
Transitional arrangements of the licensing regime for virtual asset trading platforms
Given that no VATP operators had so far been placed on the List of deemed licensed VATPs, some Members asked whether the Administration would consider removing the list or even terminating the transitional arrangements with immediate effect.
SFC explained that under the transitional arrangements, VATPs which were already in operation before the licensing regime came into effect on 1 June 2023 might continue to operate their business during the 12-month transitional period without being in breach of the licensing requirements unless they had already submitted a licence application and been rejected. SFC could not require them to immediately cease all retail business before the application deadline.
Regulation on the promotion, marketing and sales practices of virtual assets
Members expressed concern whether there might be loopholes in the promotion, marketing and sales practices of VAs at present. They pointed out that non-SFC licensees, including some online key opinion leaders, might promote VAs to retail investors without conducting due diligence on customers and products, not only rendering it difficult to protect investors’ interests, but also contravening the principle of “same activity, same risks, same regulation” emphasized by the Administration. There was also a view that as the products and services provided by financial institutions in relation to VAs were different from those previously provided in relation to physical assets, it would call for an innovative regulatory approach.
The Administration and SFC responded as follows:
(a) All along, SFC had not only monitored VA activities in Hong Kong, but also investigated and regulated suspicious activities within its regulatory ambit. SFC collected information through a wide range of channels, including complaints, media reports, exchanges with the industry and continuous monitoring of posts on major websites and social media. It also maintained regular and close communication and cooperation with responsible departments and agencies, including the Police, to enhance intelligence exchange;
(b) At present, any person advising the public on a specific security on platforms such as newspapers, radio programmes and the Internet was generally not required to obtain a licence if he did not receive income in this regard from companies relating to that security. Hence, Members’ suggestion of requiring key opinion leaders to hold a licence before they could recommend VA services or products to the public (regardless of whether they received an income in this connection from the companies concerned) might not be in line with the current regulations and measures, and the Administration would need to study the suggestion in detail.
Members considered that the large number of victims falling prey to the typical investment scam of “low risk, high return” claims was a sign that the effectiveness of investor education was still far from satisfactory. Members suggested that investor education should be stepped up, including enhancing public awareness of the risks associated with VAs and potential fraudulent behaviour, conducting publicity in a more lively and engaging manner from the public’s perspective such as by replacing text with video clips in publicity materials, as well as promoting investment education among secondary students.
IFEC remarked that it was committed to promoting investor and financial education in an engaging and lively manner, and had been keeping tabs on market developments, such that investor education would be launched once new investment products or jargon emerged in the market. IFEC pointed out that wide publicity on the basic principles of financial management could help the community guard against the ever-changing fraudulent practices. Meanwhile, elements of financial education had already been incorporated into the secondary school curriculum. The Administration would consider members’ suggestions and continue to strengthen the relevant work.