Regulatory regime for Stored Value Facilities (SVF) and Retail Payment Systems (RPS)

Hong Kong , 28 January 2016

The emergence of new technologies and innovative payment services has led to growing popularity for small-scale e-commerce transactions.

In light of this, the Hong Kong Monetary Authority (“HKMA”) and Financial Services and the Treasury Bureau (“FSTB”) jointly conducted public consultation and proposed a new regulatory regime targeting stored value facilities (“SVFs”) and retail payment systems (“RPS”). As a result, the Clearing and Settlement System Ordinance (Cap 584) was amended and renamed as the Payment Systems and Stored Value Facilities Ordinance (Cap 584) (the “Ordinance”).

This new regulatory regime was introduced in November 2015 with a one-year transitional period for existing SVFs business to integrate into the new regulatory regime.

What are stored value facilities?

There are two types of SVFs: multipurpose SVFs and single purpose SVFs. Multipurpose SVFs are used for payment for goods and services provided by participating merchants, while single purpose SVFs can only be used as a means of prepayment for goods and services by a merchant who is the issuer of the SVF.

Stored value cards such as the Octopus cards are amongst the most commonly used SVFs. There are also non-device based SVFs that have their value stored on a mobile network-based account or on a computer network-based account.

Previously, non-device based SVFs were not subject to regulation, while multi-purpose device-based stored value cards were subject to the regulation of the Banking Ordinance (Cap. 155).

What are retail payment systems?

RPS is a payment system that handles the transfer, clearing and settlement of small-value transactions. It includes credit card schemes, debit card schemes, payment gateways and mobile payment infrastructure.

Previously, the RPS was not regulated and was only subject to a voluntary code of practice.

New regulatory regime

The new regulatory regime expands the existing regulatory regime to cover non-device-based SVFs as well as RPS in Hong Kong.

The legislation introduces a mandatory licensing regime for SVFs with supervisory functions on the HKMA. It will now be a criminal offence for a person who knowingly promotes or assists another in issuing an unlicensed SVF without reasonable excuse. The legislation also empowers the HKMA to designate and oversee RPS on an on-going basis. Under the regime, only the HKMA may declare the activities that are permitted to be carried out through the designated RPS, regardless of whether the activities take place within or outside Hong Kong.

To comply with the new regime, a licensing application criteria of SVF is listed under Part 2, Schedule 3 of the Ordinance, which includes (generally):

  • Principal business of the applicable company: the applicable company must be the issue of SVF under a license or the facilitation of the issue of SVF under a license;
  • Financial resources of the applicable company: the applicable company must have adequate financial resources (whether actual or contingent) for operating its SVF scheme;
  • Fit and proper person: the applicable company must have in place adequate systems of control to ensure the HKMA is informed of the company’s relevant persons and that they are fit and proper;
  • Knowledge and experience: officers of the applicable company must have the appropriate knowledge and experience and systems of controls to ensure this must be in place;
  • Prudential and risk management: adequate risk management policies and procedures must be implemented;
  • Anti-money laundering and counter-terrorist financing measures: adequate and appropriate systems of control should be implemented to prevent and combat possible money laundering or terrorist financing;
  • Management of float and SVF deposit: if the applicable company holds a float and SVF deposit, adequate risk management policies and procedures are in place to ensure that there will always be sufficient funds for the redemption of the stored value that remains on the facility;
  • Redemption of outstanding stored value: if the applicable company holds stored value (including SVF deposit) of a stored value facility to which its SVF scheme relates, the applicable company must redeem in full the total of the stored value that remains on the facility as soon as practicable after being requested by its user to do so;
  • Operating rules: the applica ble company’s operating rules must be sound and prudent having regard to purposes of the scheme; and
  • Purpose and soundness of relevant scheme: the applicable company’s purpose, business model and operational arrangement of the SVF scheme must be prudent and sound, and be operated prudently and with competence.

Applicants who wish to commence or continue to operate SVFs in Hong Kong after the expiration of the one-year transitional period are advised to take early precautionary measures, including but not limited to applying for a license, as there will be unfavorable consequences if there is a failure to comply. The HKMA has power to investigate alleged contraventions and impose sanctions on regulated persons.

For further information please contact, Harry Lin of Lin and Associates, by email (harry.lin@laa.hk) or telephone (+852 2629 3201).

Disclaimer: This material has been prepared for general informational purposes only and is not intended to be relied upon as legal or other professional advice. Please refer to your legal advisors for specific advice. Lin and Associates accepts no responsibility for any loss arising from or out of reliance of information contained in this article.