Eddie Yue: Evolution of financial consumer protection and education in
Asia
Speech by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, at
the HKMA-SFC-OECD Asian Seminar, Hong Kong, 13 December 2012.
* * *
André (Laboul),1 Ashley (Alder),2 distinguished guests, ladies and gentlemen,
Good morning. It's my pleasure to be among such distinguished company, and for such an
important topic. On behalf of the Hong Kong Monetary Authority (HKMA), thank you all for
joining us and I look forward to the discussion here today.
In discussing consumer education and protection, the focus must of course be on benefiting
the consumer. That said, there is more than an element of enlightened self-interest for the
rest of us. For the pathway to profit does not divert around the consumer interest. It runs right
through it. Indeed, the best companies - those with long-term sustainable models of growth -
operate on the basis of a natural synergy between what is good for customers and good for
business.
This is an old lesson - but it's one we are relearning in the aftermath of the global financial
crisis. One of the gripping aftershocks from the crisis has been the mis-selling complaints
against some financial institutions. Such cases are, of course, deeply damaging to those
individual institutions. Yet they also impact on us all. When the dust settles after each
successive scandal, the lasting impression threatens the reputation not just of individual
firms, but of whole sectors. In the case of Hong Kong, where the financial industry is so
critical to the economy, this obviously carries even more importance.
Now, as a survey has found, we are fortunate in Hong Kong to have one of the highest levels
of consumer trust in banks and financial services compared to other places.3 But we've seen
in the financial crisis how fragile trust can be. So we need to guard against complacency, and
work towards ensuring that Hong Kong remains a beacon to the rest of the global financial
services industry. Whether one is a financial institution, a financial regulator or a consumer,
this is in all our interests.
So, how do we get there? In short, my argument this morning is that we will do so by
recognising the interdependence of these three groups. Each has a role to play, but each
also needs the help of the others. And, I would argue, at the heart of this interdependence
lies effective consumer protection and education. I would like to discuss briefly each group in
turn - first, the role of financial institutions.
"The role of financial institutions"
As I alluded to just now, financial-services institutions have a direct interest in upholding the
reputation of the industry as a whole. I believe success in this regard rests on two pillars.
First, nurturing a culture of honesty among practitioners. Second, an absolute commitment to
prioritise above all the customer, not profit maximisation. Or, combining both pillars, we could
summarise all that into a single, rather old-fashioned word: integrity.
In theory, that's a standard to which we are all happy to sign on to. And yet, the temptation to
put product before service, profit before client, is very real. I am sure we have all seen
sufficient examples in different places.
I believe there are a number of actions financial institutions can and should take to guard
against such dangerous practices. I will mention just three very briefly. First, greater
transparency and disclosure of the benefits and risks of investment products. Second, more
responsibility placed on financial institutions with respect to assessing the suitability of a
product for a customer given his/her risk appetite. Third, simpler procedures and freer access
for consumer to complaint and redress mechanisms. These are all things that many financial
institutions have embedded into their corporate culture and I encourage all others to do the
same.
"The role of financial regulators (the HKMA)"
This brings me to the second group, financial regulators. Given my role, I will focus
specifically on the example of the HKMA. In response to the changing landscape following
the collapse of Lehman Brothers, the HKMA expanded its efforts to protect and educate
consumers, and this change resulted in the creation in April 2010 of our Banking Conduct
Department. I will focus first on our work to strengthen consumer protection before going on
to saying something about our work on consumer education.
HKMA & consumer protection
In terms of consumer protection, first, the HKMA has introduced new requirements on banks
and issued guidelines on the selling of investment products. These include (a) requiring
audio-recording the customer risk profile assessment and sales process to provide audit
trails for reviews by banks and the regulators; (b) implementing a pre-investment cooling-off
period in the sale of unlisted structured products to less sophisticated customers (such as the
elderly or first-time buyer); and (c) requiring banks to carry out continuous reviews of product
risk and inform investors of any upward changes to the risk ratings of the products they have
purchased. These requirements were in addition to existing measures introduced by the
Hong Kong Securities and Futures Commission (SFC) on the supervision of securities
companies' selling activities.
Second, the HKMA is active in monitoring banks' compliance with these and other regulatory
requirements through thematic on-site examinations. Banks are expected to have control
processes and procedures in place to ensure adherence to the conduct regulations. In
addition, to monitor compliance levels among banking staff, the HKMA conducts mystery
shopping trips.
Third, the HKMA has strengthened consumer protection by working with partners. One
example is our work with the Hong Kong Association of Banks in carrying out a
comprehensive review of credit card practices in Hong Kong, drawing on reforms undertaken
in the UK and US. As a result, we have been rolling out in stages 31 measures aimed at
promoting fair and responsible business practices by credit card issuers, and all these will
become effective by 2013. A second example is our partnership with the Financial Services
and the Treasury Bureau and the Securities and Futures Commission to establish the
Financial Dispute Resolution Centre. The objective is to help consumers settle monetary
disputes quickly by means of mediation and arbitration. The Centre came into operation in
June this year.
The HKMA & consumer education
On consumer education the HKMA has also been very active. From time to time, we publish
articles, called "insight articles", to increase consumers' awareness of their rights and
obligations in relation to particular consumer products like accumulators, Octopus cards and
instalment payment plans. We also highlight key features and risks of certain investment
products, and remind consumers not to invest if they do not understand a product. We have
launched earlier this week a "Consumer Corner" on the HKMA website to provide important
information on local banking consumer issues, including a set of "frequently asked questions"
based on public enquiries and topical issues.
As with protection, so with education, we are also working with our partners. Among these
initiatives, we are joining with the Consumer Council in their consumer awareness
campaigns. Another very important initiative I'd like to highlight, is our work with the
Securities and Futures Commission to establish an Investor Education Centre (IEC). The
HKMA will supplement this with additional consumer education independent of the IEC,
focusing on areas such as banking products and services, as well as other investment
products that may not be covered by the IEC.
"The role of the consumer"
So, as well as good practice among financial institutions, financial authorities also have an
important role to play in enhancing consumer protection and education. But focusing on just
those two groups leaves out possibly the most important group of all - the consumers
themselves, to whom I will devote my remaining remarks.
One of the things on which the global financial crisis cast a cold light was the implicit cost to
households - and indeed to society and financial markets - of low levels of financial literacy.
Financial literacy is increasingly recognised as an important individual life skill that people
need to thrive in a modern economy like Hong Kong. Without it, consumers can be at risk of
mis-buying and bank employees are themselves at a higher risk of mis-selling.
For example, one of the hallmarks of our financial sector in this city is the universal banking
regime that allows banks to offer basic services as well as a wide range of financial products.
This is a great strength for the industry and highly beneficial to both banks and consumers.
However, we should also acknowledge that it can expose some customers to higher risks
arising from investment in complex financial products. I have in mind especially consumers
who may be less sophisticated but who may nonetheless have a high level of trust in banks.
In that sense, it was not surprising that following the financial crisis, there was greater
demand by consumers and consumer groups to better understand the risks of investment
products offered by banks. This demand has been amplified by a number of other trends,
namely: the greater complexity of financial products; the rapid pace of change in financial
standards and regulations; the rising number of high net worth individuals in Asia-Pacific
actively looking for investment opportunities; and the recognition that regulation alone is
insufficient to protect consumers.
Financial education has thus become an important complement to market conduct and
prudential regulation. Raising the financial competencies of individuals has become a
long-term policy priority for the financial industry. This is particularly crucial in Hong Kong
where, as you know, we have a regulatory framework based on disclosure and
complementary customer suitability assessments.
In that context, it is especially important that consumers understand a product's features and
risks thoroughly when considering their investments. They have to decide whether or not an
investment suits their objectives, and whether they have the ability to assume the associated
risks. Thus, a key component of any efforts to enhancing financial education and protection
must be improving individuals' ability to ask the right questions and increase their awareness
that ultimately they are responsible for their investment decisions.
"Conclusion"
So, we've discussed how important consumer protection and education are. And we've
covered the roles of each of the three groups in bringing about better protection and
education. Let me now try to bring these strands all together.
Something that became very clear in the wake of the financial crisis was that apparently
low-probability risks at the margin of an industry can have profound impacts - and that a
rules-based system alone is inadequate in guarding against them. After the crisis, there has
been increasing recognition that each of us in fact operates in a financial eco-system - in
some respects, a fragile system - in which the well-being of the whole rests on the health
and actions of each part.
Through suasion and regulation, financial regulators like the HKMA can do a lot to support
consumers. But we will always be one step remote from the point of transaction. That's why
we look to banks and other financial institutions not just to follow our rules, but to show
leadership by really engaging in this area. Institutions can do a lot, individually and together,
to self- and peer-regulate and, above all, ensure integrity throughout their organisations,
particularly at the consumer-facing levels.
In the end, though, in this financial eco-system as with any other, so much depends on its
beating heart - the consumer. That's why I believe one of the best things we in this room can
do is to bend our efforts towards greater financial literacy. Through initiatives to better inform
and empower consumers, they can be the judge of their own best interests. That way, the
benefits accrue not only to individual consumers, but to the sector and society more widely.
Education requires long term commitment and effort from us all, but the prize is also great.
Ladies and gentlemen, over the next day or so, we have the opportunity to make a real and
substantial contribution to this agenda. For that reason, I am most grateful to you for joining
us, and I very much look forward to our discussion and exchange of views. Together, I am
sure we can learn and develop further many good measures. Measures that will not only help
consumers, but will also improve the health and strength of the financial sector and our
economies more widely.
Thank you.