Proposed establishment of an Investor Education Council and a Financial Dispute Resolution Centre
Division 1, Financial Services Branch
Financial Services and the Treasury Bureau
18/F, Tower I, Admiralty Centre
18 Harcourt Road
Proposed Establishment of an Investor Education Council and a Financial Dispute Resolution Centre
We are writing with our response to the above Consultation Paper.
Overall, we welcome the two developments and consider that they represent a step forward in the right direction for Hong Kong. We have a few comments, below, for your attention.
Investor Education Council
We are in general agreement with the proposal to establish the Council as a subsidiary of, and funded by, the SFC.
As a minor comment, we wonder why the institution has the name ‘Council’. ‘Council’ would seem to imply a primary role of representation and governance, whereas the role of the IEC should in fact be one of doing, i.e. carrying out investor education. A name such as ‘Institute’ may more appropriately reflect this mission.
We are also supportive of the proposed mode of operation, namely the focus on explanation, avoiding the appearance of making investment recommendations, the step-wise expansion of educational activities, and the carrying out of surveys to track the education needs of the investing public. We also support the idea of reaching out to schools to stimulate young people to be financially aware.
One observation we have is that investors do not merely need to be alerted to risks and to good questions to ask their advisers, but also need advice on how to use the various financial products and how to compare one product with one another. To give such advice would obviously expose the IEC to the risk of appearing to recommend investments, but on the other hand the added value of such advice to the investing public would be high. To be capable of giving such advice, the IEC would need to recruit some experienced market people among its staff. We recommend that the IEC proceed cautiously to develop its capabilities in this regard. It would appear useful to conduct a formal review of the IEC after say three years of operation, in order to identify possible fine-tuning.
Financial Dispute Resolution Centre
Again, we are supportive of the thrust of the recommendations, namely to establish the FDRC as a venue for mediation at a modest charge to the consumer. However, we have certain caveats and comments, as below.
One caveat is that, ideally, financial disputes would be resolved between the parties in the courts where the facts would be uncovered through the judicial process and subject to determination in accordance with the law. We accept that it is not practical for most consumer disputes to be resolved in this way because of the disproportionate cost and resources involved, and that resolution via an institution such as the FDRC represents a reasonable practical alternative. Mediation is also favoured by recent Hong Kong judicial reforms. However, it should be recognised that such alternative dispute resolution will tend to be of lower legal quality, i.e. less fair and equitable, as it will depend on the personal views of the mediator or arbitrator. We therefore recommend that from the beginning there should be a strongly-established process to review cases. And after say a three year period of operations, there should be a fundamental review of whether the FDRC is achieving is objectives.
Our second caveat is that we would expect, where mis-selling has occurred, that the offending institution not only be required to make restitution to the affected investor but also prosecuted and if found guilty punished by fines or withdrawal of licence, etc, in accordance with the law. We are uncomfortable that the settlement of the Lehman minibond mis-selling involved only restitution and no other punishment for the financial institutions concerned. Although there may have been merits in clearing the matter up quickly, we are concerned that the institutions ‘got off lightly’ and perhaps at some future point may be tempted to mis-sell again. We note that paper envisages the regulator keeping in touch with the FDRC so as to monitor and if necessary investigate repeated incidents. The effectiveness of this link should be the subject of a review process, as noted above.
We are unclear how the proposed FDRC would deal with a Lehman minibond type of case, i.e. mass mis-selling of financial products. Presumably this would be a case with ‘wider implications’ to be handled by the financial regulator (paras 4.6-9), but if so, this would not seem to be much of an advance on the present situation. If the FDRC is only expected to handle a small number of minor cases, we wonder if it is worth establishing at all. Consideration needs to be given to some form of ‘class-action’-style dispute resolution where large numbers of persons are affected.
We support charging the consumer a small amount (the paper recommends HK$500 or HK$2,000, depending on claim size) to deter frivolous complaints. However, we are not sure whether the full cost of arbitration should be borne by the parties equally after the first HK$25,000, since this would seem to favour the financial institution which will generally be in a much better position to pay than the claimant.
As for the long-term funding of the FDRC, we draw attention to the enormous reserves of the SFC, and suggest that it play a role in such funding, beyond the first three years proposed in the paper.
We hope our suggestions and comments are helpful.
Alan Lung Ka-lun (龍家麟)
Chairman, Hong Kong Democratic Foundation (香港民主促進會主席)
22 April 2010