On 23 January 2015, the Hong Kong government published the Clearing and Settlement Systems (Amendment) Bill 2015 (the “Bill“), which will introduce a new regulatory framework for stored value facilities (“SVF“) and retail payment systems (“RPS“). The regulatory framework will be introduced under the Clearing and Settlement Systems Ordinance (“CSSO“) which currently legislates for oversight of interbank clearing house transfer systems in Hong Kong. The CSSO will be renamed as the Payment Systems and Stored Value Facilities Ordinance(“PSSVFO“).
The explicit aim of the Bill is to enhance public confidence in payment services and introduce reforms that will maintain Hong Kong’s status as a leading international financial centre.
Stored Value Facilities
SVFs are broadly defined in the Bill as facilities which may be used for storing value of a pre-paid amount of money for the purpose of making payments for goods or services. The regime would cover both device-based multi-purpose stored value products such as the Octopus Card and non-device-based multi-purpose stored value facilities, which store value on mobile and internet-based accounts.
Currently, only device-based SVFs are regulated in Hong Kong, with the “Octopus” card used in the city’s public transit system and at retail terminals being the only active licensee. A key consequence of the new framework will be to bring all multi-purpose SVFs, including non-device based ones, within the scope of regulation to protect users’ stored value and, more broadly, to regulate the float maintained by SVF issuers in order to meet payment demands. Subject to certain class exemptions, all SVFs will be subject to mandatory licensing requirements and it will be a criminal offence to operate a SVF in Hong Kong without a licence. Exempted SVF classes include:
- single purpose SVFs such as prepaid cards or loyalty cards issued by retailers;
- department store SVFs that may only be used for purchasing goods or services from the issuer;
- bonus and loyalty point schemes where the points collected are not redeemable for cash; and
- SVFs used to purchase digital products where goods or services are paid for through, delivered to and intended to be used through an electronic device. This exemption is intended to cover online platforms offering third party content such as music, games and apps.
SVF licence applications will be assessed against a number of requirements including the applicant having adequate resources for operating the SVF scheme, the applicant having paid-up share capital of not less than HKD 25m and the officers of the scheme having appropriate knowledge and experience to discharge their duties responsibly. Operating an SVF without an appropriate licence will be punishable by a fine of up to HKD 1m and 5 years’ imprisonment. Banks licensed under the Banking Ordinance will be deemed to be licensed as issuers and facilitators of SVFs.
Retail Payment Systems
Under the PSSVFO, RPSs will broadly encompass any system or arrangement for the transfer, clearing or settlement of payment obligations relating to retail payments. Only designated RPSs will be regulated. The criteria for designation will limit the PSSVFO’s scope to those RPSs that are so substantial that disruption of their operations would have wider adverse impacts on Hong Kong’s monetary or financial stability, the public’s confidence in its financial systems or its day-to-day commercial activities. It remains to be seen whether or not more specific designation criteria will be published, such as daily transaction volumes. Under the proposed framework, a designated RPS will be overseen by the HKMA. The RPS will be required to have in place operating rules to provide for the system to be operated in accordance with strict requirements.
Hong Kong’s payment services reforms are timely given the rapidly evolving market for payment services in Hong Kong and elsewhere, and the increasing importance of electronic and mobile payment systems to retail markets. The introduction of SVF and RPS regulation to Hong Kong will help bring clarity to a number of areas of payments processing which are currently operating in a “grey area.”
The Bill introducing the PSSVO is expected to pass in this legislative session. The Executive Council has proposed that the regime be introduced with a one year grace period to allow applicants to complete the licensing process.
