Consumer Credit Issues in Hong Kong SAR, China
Pamela W.S. CHAN
Chief Executive
Hong Kong Consumer Council
Hong Kong SAR, China
E-mail: ce@consumer.org.hk
This paper examines issues related to the consumer credit sector in Hong Kong, and
matters the Hong Kong Consumer Council has considered in its work of safeguarding the
interests of consumers.
Economic environment
The issue of consumer credit always begins with the current economic environment.
Pressure on the supply side from service providers who face stiff competition in an
environment of static demand can bring about desperate and unfair practices by service
providers. By the same token, consumers who are facing economic difficulties and
desperate times can be more vulnerable to undesirable business practices.
The current economic climate in Hong Kong has brought about an unprecedented decline
in the value of assets in the property market (60%) which has left many people with
negative equity and problems of debt. Coupled with the aggressive marketing of credit
cards, this has resulted in a large number of consumers falling into a debt trap. As a
result there has been an escalation of disputes over excessive financial charges on
defaulting credit card loans (accumulated interest charges in some cases have totalled up
to 60%) and complaints have been received against unruly conduct of debt collection
companies.
In the process of undertaking its work over the years through assisting consumers with
complaints, disseminating information on consumer issues, and providing advice to
government and industry, the Consumer Council has worked on a number of major
matters of importance in the area of consumer credit. These are:

Contract terms and conditions

Quotation of Interest Rates

Sharing of consumer credit information (and related issues such as competition,
industry marketing practices, and privacy)
Regulatory mechanisms
The credit industry in Hong Kong can be divided into two basic areas of service
provision.
First, there are money lenders, licensed under the Money Lenders Ordinance who provide
a source of credit including consumer and commercial loans, mortgages, small and
medium enterprise loans. These types of credit providers are bound by legislative
provisions that prevent them from charging interest rates beyond a certain limit1 and are
licensed and regulated by the Hong Kong Police Force due to the prevalence of criminal
activity that may arise through the actions of these types of businesses.
Second, there is the Hong Kong banking sector (banks and deposit taking institutions),
which provides large amounts of credit such as housing mortgages, overdraft facilities,
and credit card services. The banking sector is regulated by:

A prudential regulator, the Hong Kong Monetary Authority (HKMA) that also
takes an active interest in consumer protection measures and works closely with
the Council; and

Two industry associations, whose members are obliged to observe a voluntary
Code of Banking Practice. The Code requires financial institutions to abide by
certain rules that are aimed at protecting consumers.
The Consumer Council is neither a law enforcement body nor a regulator. However, it is
quite effective in this sector in its own right:

through mediating disputes between consumers and business;

through the application of persuasive argument in dealing with industry self
regulatory bodies and government regulatory authorities to amend codes of
conduct and legislation;

through detailed research and market surveys which are disseminated publicly
through its magazine, and the media generally to provide comparisons, for
example, of charges and fees and inform consumers as to the perils that await
them in the marketplace as well as assistance to make informed decisions; and

through providing assistance to consumers where the right of private legal action
exists.
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Contract terms and conditions
Terms and conditions of banking services are essential to any transaction. However, it is
of concern that the information on terms and conditions, when it is provided, is invariably
in small print and difficult to read. Up until recently in Hong Kong, some of the terms
and conditions were also unacceptably drafted to satisfy the banks' interests at the
expense of consumers' legitimate rights. This raised issues of fairness, and in particular
unconscionable conduct.
Unconscionable conduct
There were some comments from industry that providing the terms and conditions, which
are quite lengthy and detailed, are cumbersome when marketing credit cards. Moreover,
some institutions felt they were not obliged to do so up front because a bank/customer
relationship is not established until a credit cardholder actually uses a card. Therefore, it
has been industry practice to not provide a copy of the terms and conditions to applicants
for credit card services at the time of making the offer, as they are not at that point
considered as "customers" of the institutions.
A landmark case in the history of consumer protection law in Hong Kong on credit card
payments in 2000 bears out the need for a full set of terms and conditions to be made
available to consumers. It also pointed to the need to have a suitable mechanism for
consumer redress in order to have onerous financial charges and debt collection fees
imposed by credit card issuers struck out. The details of the court case are as follows:
The court case concerned consumers who were subjected to onerous debt collection
practices by some banks in Hong Kong, set out in the terms and conditions of credit card
contracts agreements which require customers to be responsible for all costs and expenses
incurred by credit card issuing banks in recovering debts owned by the customers, on a
full indemnity basis.
Some credit card issuing banks sued their customers for unpaid credit card balances. The
customers did not defend themselves in the proceedings. Having obtained default
judgment, the banks relied on the above indemnity clause in the credit card agreement
and applied for costs, but to no avail. The banks then appealed against the decision. As
it was a matter of public concern whether the indemnity clause was enforceable under the
Unconscionable Contracts Ordinance, the High Court invited the Council to appear as
amicus curiae to address issues relating to the Ordinance in the appeal. Taking into
account relevant survey findings and related information provided by the Council, the
court held that the clause was unconscionable under the Ordinance and was therefore
unenforceable.
The Court ruling forced industry to make changes to the Code of Banking Practice which
specified that all charges must be reasonable and that card issuers are required to draw
attention of customers to major terms and conditions, which impose significant liabilities
on the customers in the application forms for card services. This would at the very least
help consumers in making comparison on the different card services available in the
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market and enhance consumer choice and possibly motivate some competitiveness in
what terms and conditions are made available in contracts.
The Consumer Council advised the banking regulator on amendments to the Code of
Banking Practice to serve two functions:

First, the amendments would ensure full consideration of the need to satisfy basic
consumer interests as to fairness.

Second, the amendments would assist credit providers in avoiding terms and
conditions that can be subject to legitimate legal dispute and therefore avoid being
exposed to legal action.
Debt collection agencies
The above case also highlighted the issue of debt collection agencies. Allegations have
surfaced over time that debt collection agencies in Hong Kong used hair raising tactics
such as setting fire to debtors' homes, assault and other forms of harassment and
coercion.
In 2002, the Law Reform Commission released a report 'The Regulation of Debt
Collection Practices' on proposals to reform the law governing the way in which
creditors, debt collection agencies and debt collectors collect debts in Hong Kong.
The proposals were in response to public concern at the improper practices used by some
involved in debt collection. At present, while the criminal law provided some protection
against abuses, there was no overall framework for regulating the activities of debt
collectors.
The major recommendations in the report were the creation of a new criminal offence of
unlawful harassment of debtors and others, with specific prohibitions against
inappropriate debt collection practices such as harassment and false representation, and
the establishment of a statutory licensing regime.
The above recommendations made were passed to the relevant policy bureau of the
Administration for consideration. As at 21 February 2003, there is no indication that the
recommendations have been implemented, either in whole or in part.2
Providing assistance to consumers
The Council administers a fund known as the Consumer Council Legal Action Fund
which was established with a Government grant to the Council of HK$10 million
(US$1.2 million). The Fund aims to give greater consumer access to legal remedies by
providing financial support and legal assistance for the benefit of, particularly,
individuals or groups of consumers with similar grievances in cases involving significant
public interest and injustice. Through supporting justifiable cases, the Council's fund also
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aims to deter undesirable business practices and educate the public as to their existing
consumer rights.
Quotation of Interest Rates
Banks use different systems to quote interest rates. For example, consumers are not
aware that 0.35% per month which appears to be at the low-end of the scale ends up to be
almost 10% per annum. The Council has consistently argued that banks should use a
common formula to disclose the "true" cost of credit card borrowing to customers.
In a 2002 survey of advertising produced by financial institutions the Council found
exaggerated claims of low interest rates, leading to situations such as

Rebate of interest of 6 months for an instalment loan of 36 months does not mean
rebate of 1/6 or 16.7% of the interest paid. It is calculated on the basis of 'Rule
78', a jargon few consumers will understand, which means rebate of interest of
only 21/666 or about 3.2%.

A $80,000 loan to be repaid at a low monthly instalment of $1,440 is actually
applicable for only the "Deferred Principal Payment Option" i.e. repayment of
interest only without any principal in the first few months of the loan. This
effectively creates the perception of cheap credit but consumers actually pay more
interest in the end.

Advertising "low introductory interest rate" in comparison with the rates of other
loan credit to highlight savings. However, once the introductory promotional
period ends (usually 3 to 4 months), the interest savings will be substantially
reduced.

Benefit offers are dependent upon such conditions as punctual payment record
and no early redemption of loan or keeping a high credit utilization rate. So,
eventually, consumers may not be eligible to receive such benefits. But the
benefits are factored into the advertised Annualized Percentage Rate (APR), thus
grossly under-stating the APR.
The Council urged the industry to use a common method for calculating the Annualized
Percentage Rates (APR) of credit card advances and that all relevant fees and charges
should be taken into account in the calculation of APR. This suggestion was eventually
accepted by the industry for all revolving loans e.g., credit cards and personal loans, after
the abovementioned successful court action brought against certain banks for
unconscionable conduct. However, this is not applicable to deposits, overdrafts and
mortgage loans.
Collection of consumer credit information
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The average charge-off ratio for Hong Kong banks' credit card portfolios reached 13.25%
in 2002, more than double the previous year's 5.46% rate. In addition, the bankruptcy
rate soared from an annual figure of 639 in 1997 to 25,328 in 2002.
Industry blamed the increase on two factors:
a) The lack of information about consumers' levels of indebtedness that had led to
some credit providers unwittingly providing consumers with credit beyond their
means of repayment.
b) Hong Kong's reform of Bankruptcy Law - to discharge bankrupt in 4 years
(international standard) from the previous practice of 7 years.
Industry subsequently obtained support to expand the database of shared information on
consumers currently limited to so called 'negative' information, i.e. records of late
payments, loan defaults and bankruptcies, to include 'positive' information, i.e. records of
loan amounts outstanding and the numbers of credit cards held by a person.
The Consumer Council had long expressed reservations on the industry proposals to
expand the range of information on consumers' personal credit information. The
Council's concerns with the proposal were as follows:
'Big Brother' data base
The proposal would increase the store of centralised personal information on citizens in
the hands of one commercial entity. Moreover, such positive credit exposure information
could include information on mortgage loans which normally have a time span of 15
years or over. Consequently, the information kept on an individual would last for an
extremely long time.
Further, the Council was concerned at the magnitude of a data bank that includes so
called positive information, as it may create an entity that is difficult to monitor. For
example, the importance of the data bank could well attract hackers into the system.
Pressures could also arise to expand the usage of the range of information collected for
other purposes, i.e., to create a new practice in the financial sector that consumers must
produce a 'good credit certificate' (for which consumers must pay) when obtaining loans.
As a result, the Council considered that questions arise as to whether the data should be
in the hands of a commercial entity.
Doubts on effectiveness of privacy safeguards
While the Hong Kong Privacy Commissioner has a role to ensure there are adequate
safeguards in place to protect the information from being misused, the track record of the
commercial sector in ensuring data privacy, was far less than reassuring. For example, as
evidenced by the various cases of leakage and unauthorised sale of personal data and
continual 'cold calling' by estate agents on property owners, and bank staff on customers
etc.
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In view of the privacy concerns with storage of positive credit information, the industry
should demonstrate that the existing 'Code of Practice on Consumer Credit Data' is a
useful means of ensuring privacy through, for example, supporting the prosecution of
violators and or supporting amendments to improve existing legislation.
Identifying 'root causes' to problems of indebtedness
Importantly, the Council stressed that rather than attempting the ambitious step of
collecting even more personal information on consumers, the industry should explore
what steps should be taken to address the underlying problems that lead to indebtedness.
For example, the Council was concerned that some banks adopted, and still adopt, a
rather 'aggressive' approach in soliciting customers and that credit card issuers should be
more prudent in the way they issue cards and raise credit limits, rather than issuing them
indiscriminately and enticing consumers to expose themselves to even more credit. This
included the mailing of pre-approved credit card applications; and heavy inducements for
customers to pay the minimum amount due, while not mentioning the consequences, i.e.
high interest rates for unpaid amounts and new expenses incurred.
Common advertising features that the Council became aware of, through complaints and
inquiries from consumers, were as follows:

Credit providers represented to consumers that they only needed to pay minimum
monthly payments to secure access to large amounts of readily available funds.
However, the advertisements fail to fully inform consumers of the compounding
effect of interest on the debt. Needless to say, the full costs of repayment in terms
of the number of years required to pay off the amount owing was the reason why
many consumers had sunk deeply into unsustainable debt. One example, given in
a Council press release alerting consumers of the pitfalls in accepting the enticing
offers from credit providers, if you owe $50,000 and repay only the minimum (i.e.
5% of the outstanding balance) each month, it will take you a total of 15 years to
repay the full debt, and on the basis of an interest rate of 30% per annum, you
would have paid $49,400 in interest cost.

Another marketing tactic was the practice of encouraging customers to, in effect,
take out an overdraft in the first weeks of obtaining a credit card, and repay the
minimum balance in the first three months in order to obtain a prize.

A variation of this tactic was to promote the borrowing of a substantial installment
loan to be repaid at a set amount over a set period of time, in order to receive a
prize.

Sadly, the market for university students was also hotly contested by loan and
credit card providers with disastrous results for some. There were frequent
promotional activities on the campuses of universities that offered special
revolving credit loans and personal instalment loans set up exclusively for
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university students. Full-time students were not required to provide any income
proof and could easily acquire credit of up to $20,000. This resulted in some
students being led into heavy debt and declared bankrupt without full knowledge
of the dire consequences for future careers.
Use of existing credit information facilities
The Council also felt that industry should examine whether the way in which the current
negative information data base is interrogated needed to be improved. For example, there
was a concern that names of consumers were not always cross checked against the
recorded Hong Kong Identity card number, to clarify that the information in the database
referred to the correct person. In these circumstances persons with the same name might
be penalized through mistaken identity. There was also a concern that institutions did not
even check the current negative information data base before providing credit.
Seeking 'trade offs' to the loss of privacy
Suggestions had been made by industry that enhanced information on consumers would
lead to customised products for individual consumers. If this was the case, the Council
suggested that financial institutions should have already customized interest rates for
those customers who had demonstrated that they are a good credit risk under the existing
information collection mechanism. This would be an indication of the industry's good
faith that customizing interest rates will also happen in the future with the collection of
positive credit information.
In past discussions with the Council, the industry had also provided research material
from other jurisdictions that quantified the benefits to consumers of an expanded credit
information database in those jurisdictions. Some benefits were said to be: increased
competition, the ability to customise different interest rates for different customers, and
increased access to credit by consumers that are currently unable to prove they are a good
credit risk. Another major benefit that was claimed to flow from the increase in shared
information was that it would help address the problems of multiple delinquencies and
increasing levels of bankruptcies.
As mentioned above, the Consumer Council has expressed the view that the problem with
individuals' over indebtedness may be the result of the indiscriminate issuing of credit
cards by financial institutions.
Consumers have been encouraged to expand credit by financial institutions through credit
card installment plans, minimum settlement plans, and bonus gifts. The aggressive
promotion of credit services has tempted consumers into debts that are beyond their
repayment ability; resulting in rising bankruptcy rates. The Council was of the view that
other measures may be as effective and without the privacy repercussions. For example:

expanding the sharing of negative information, for example only sharing
information on those consumers who only pay the minimum amount

to have credit card applicants voluntarily declare the number of credit
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cards and their repayment history; and

introduce criminal law suit for those who make false declarations and
attempt fraud, as in the case of Switzerland.
The Council's counter proposal to the government was unsuccessful. Government
decided to allow the sharing of positive credit information. However, by the same token,
the Council's concerns with industry conduct was recognised and the industry has taken
steps to review over aggressive marketing tactics.
The need to set benchmarks
The Council has also taken the position that if the credit information database is
expanded, then consumers cannot be expected to accept a sacrifice to their privacy if the
industry and government cannot clearly tell them what they get in return. Accordingly,
the Council has requested the government and industry to clearly establish some likely
goals that will be achieved in Hong Kong, within a reasonable period of time, if the
proposal goes forward.
The Council argued that based on past assertions made by industry and government as to
benefits of expanding the database, the following factors should be recorded as the
increased information becomes available to industry, to measure what if any gains have
been achieved for consumers.
a) The differentiation in interest rates for those consumers with different credit risks.
b) The reduction in default rates and bankruptcies, that are attributed to the fault of
debtors, rather than economic causes.
c) The increase in the percentage of consumers who will be eligible to obtain credit
under the expanded data base, as compared to the level under the current limited
data base.
d) The decrease in other costs of finance, such as the required down payment,
convenience of access, credit limits and fees.
The industry has also made general assurances that there will not be any increases in
abusive access to the consumer information database. This also suggests that a goal
should be set, against which the new procedures can be measured.
The Council suggested that if a positive result is not achieved for consumers, based on
the above variables, then the intrusion into consumer privacy brought about by the
increased sharing of information should be halted and the shared data base should revert
back to the previous 'negative' only basis.
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Credit card interchange fees
Apart from the card fees that cardholders are charged by their financial institution,
consumers may not be aware that credit card interchange fees will have an effect on
them. There are two types of fees related to credit card transactions. First, there are
'interchange fees' which are payments between two financial institutions, usually banks,
commonly referred to as the 'issuer' and the 'acquirer'. Second, there are merchant
service fees which are fees charged by a merchant's bank for each credit card transaction
that it has to process.
Interchange fees enable financial institutions whose customers use credit cards issued by
them (the issuer) to recover some of the costs of issuing the cards from those institutions
(the acquirer) whose merchants have accepted the card for payment and the institutions
have, as a result, acquired a merchant service fee. The merchant service fee is almost
always calculated as a percentage of the value of the transaction, to cover the costs of
processing the transaction (known as acquiring services).
The level of the merchant service fee varies because it is a function of the competition
between banks to attract merchants. Both major card associations (Visa and Mastercard)
have rules regarding the extent to which merchants pass on the costs of accepting credit
cards as payment by customers. These rules differ between the two associations and are
either:

a blanket 'no discrimination' rule, in that merchants are prohibited from stating
two prices, i.e. one price for cash and another credit cards (Visa); or

a 'no surcharge' rule, in that merchants are not allowed to apply a surcharge when
a card is presented for payment, but they are allowed to provide discounts
(Mastercard).
The extent to which potential competition problems arise in this scheme of fee setting and
collecting arises in two ways:

first, the collective decision making by competing banks in the credit card
associations suggest that fees are not being set at optimally efficient levels, and

second, that some banks would have market power which can be leveraged to
their benefit in setting the fees that they receive or have to pay, to the detriment of
smaller credit institutions because of the barriers to entry that arise.
The issue of collective agreement by credit service providers on credit card network
interchange fees is a matter that various countries/territories, including Hong Kong, are
now investigating, or have already subjected to scrutiny. This highlights the need for
consumer advocates to recognise the importance of being vigilant on competition issues
that arise in the context of network payment systems.
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An inquiry conducted by the Hong Kong Consumer Council in 2000 into the collective
action of banks operating a debit card network payment system in Hong Kong is a case in
point. In that matter, the banks were considered by the Council to have misused their
market power to substantially increase discriminatory fees against certain merchants, ie.,
at a percentage of the total monetary value of the transaction rather than a fixed fee. They
were able to impose such a charge as the merchants had been locked into using the debit
card system. Following the Council's report, in which it also noted that the collective
setting of credit card interchange fees was a matter that warranted government scrutiny,
the Hong Kong banking regulator undertook an inquiry into network retail payment
systems generally.
Common banking practices
The above practice of credit card issuers agreeing on the fees charged between each other
in the operation of credit card network payment systems, is an example of common
banking practice that can emerge on an international or regional scale.
This is not unusual given that many banks are international corporations or at least they
have many occasions to share experiences at an international or regional level. For
example, through international and regional conferences, the financial press, and
International Monetary Fund or International Chamber of Commerce meetings.
It would follow that through this sharing of information and experience that a common
level of banking practice can emerge at a global level, on consumer issues. This common
practice may not only emerge in relation to how to attract consumers to banks' products,
but also procedures such as levying debt collection charges and imposing onerous terms
and conditions that serve a common banking interest.
For example, in general, card network operators (e.g. Visa, MasterCard, American
Express) levy a conversion charge – from foreign currencies into the US Dollar and then
the Hong Kong Dollar – of 1% to 1.1%, to cover exchange risk and operating costs. But
on top of this conversion charge, according to a 2002 Council's survey on 26 credit card
issuers, all but 9 issuers also imposed a levy on overseas transactions in foreign
currencies. Such a levy could vary from card to card, ranging from 0.2% to 1%.
Together this conversion mechanism effectively meant cardholders were required to bear
a total surcharge of up to 2% for their purchases conducted in foreign currencies. In
other words, for every HK$10,000 (US$1,282) worthy of purchase, cardholders pay an
extra of up to HK$200 (US$26).
Given that conversions are made at the posting dates rather than at the dates of
transaction and due to the fluctuation in foreign exchanges, it is quite impossible for
cardholders to estimate, with any accuracy, the exact cost of their credit card spending
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abroad, which is further complicated by the present lack of transparency of card issuers in
the provision of this service.
There is a need for consumer organisations to match this form of information sharing and
experience by the banking sector, and to be vigilant in terms of acquiring appropriate
rules and regulations to protect consumers from unfair banking practices.
Denial of Service
The above discussion deals with issues relating to the provision of credit services by
financial institutions. However, there is another dimension to this sector that affects
consumer welfare - denial of service. It is important for consumer advocates to
remember that a banking account, with relevant services, is no longer a discretionary item
of purchase but is a necessity for virtually all consumers in modern society, in the same
way as telecommunications and the use of electricity.
The practice of applying fees for a myriad of services that previously were supplied as
part of a total service often leaves consumers with negative returns on amounts held with
banks, or worse still actually having to pay for the privilege of depositing funds with a
bank.
Moreover, as banks strive for increased levels of efficiency, they choose to degrade non
price aspects of competition, such as convenient branch locations and widely available
and quick counter service. Instead, they have tended to close branches were they are
deemed to be not profitable, i.e., mostly in the poorer neighbourhoods of a city. Also,
replacing counter staff with Automatic Teller Machines has created a technological
divide that denies or makes it very difficult for consumers who have trouble adjusting to
dealing with machines to access services. As a result, it is often the poor, the elderly and
the disadvantaged (e.g., the mentally disabled) who become outcasts inthe provision of
banking services.
Role of Consumer Organizations
In summary, there are a number of pointers of which consumer advocates need to be
aware.
(1)
Be vigilant, study current safeguards and consumer complaints and benchmark
with international practice.
(2)
Advocate for reform, work with regulators if they are receptive of Consumer
Organization's views, otherwise, work outside the system.
(3)
Pursue an aggressive information role. The market carries an array of products
and advertising puff which can be confusing to consumers and which change as the credit
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providers attempt to attract customers. Conduct surveys, studies on market practice and
provide information for consumer choice that will lead to empowerment.
(4)
Ensure that the education role also focuses on the younger generation. The
prudent use of money is rarely taught in schools and is a role that consumer advocates
should willingly take up as it empowers the next generation of consumers to be more
astute with resultant benefits for the community and the economy alike.
(5)
Target assistance at areas such as:
(a)
(b)
resolving consumer complaints
counselling on debt problems
This will not only empower consumers but also raise the profile of the consumer
organisation.
(6)
Take on a watchdog role, vis-à-vis the industry regulator and relevant trade
associations.
(7)
Be involved in the consumer movement through sharing experience with others,
and pushing for reform at the international as well as the domestic level. Consumers
International should lobby for pro-consumer policy and practices in international banking
practice in the same way as it undertakes representational work at Codex.
1
A money lender who lends or offers to lend money at an effective rate of interest which exceeds
60% per annum commits an offence (cap 163 s 24 (1) Money Lenders Ordinance).
2 Specific details of the Law Reform Commission's recommendations were as follows:
(1)
A new criminal offence of harassment of debtors and others should be created, so that it will be an
offence if a person, with the object of coercing another person to repay a debt, –
(a)
(b)
(c)
(d)
harasses the other with demands for payment which, in respect of their frequency or the
manner or occasion of making any such demand, or of any threat or publicity by which any
demand is accompanied, are likely to subject him or members of his family or household or
any other person to alarm, distress or humiliation;
falsely represents, in relation to the money claimed, that criminal proceedings lie for failure
to pay it;
falsely represents himself to be authorised in some official capacity to claim or enforce
payment; or
utters a document falsely represented by him to have some official character or purporting
to have some official character which he knows it has not.
(2)
Debt collection agencies should be licensed by a new licensing authority, and it should be a
criminal offence to collect debts as a business without a valid licence.
(3)
The proposed licensing regime should cover both consumer debts and commercial debts, and both
individual and corporate debt collectors.
(4)
The licensing authority should formulate a code of practice following consultation with
representative bodies of credit providers, debt collectors and consumers. In an appropriate case,
breach of the code should entitle the authority to revoke, suspend or decline to renew the licence of
the party in breach, and to impose other penalties such as reprimands and fines.
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