Legal update: Stored Value Facilities: Are you ready for the 13 November 2016 deadline?02Sep2016
With the rapid development and growth of non-traditional and digital payment and settlement facilities in recent years, a new regulatory regime was needed in Hong Kong to protect users of stored value facilities (“SVFs”). In particular, regulators wanted to ensure that issuers and operators of SVFs are sufficiently liquid to meet their payment obligations under such facilities.
On 13 November 2015, the Clearing and Settlement Systems Ordinance was amended and renamed as the Payment Systems and Stored Value Facilities Ordinance (“Ordinance”). Subject to a one-year grace period, the Ordinance introduced a mandatory licensing regime for the regulation of SVFs in Hong Kong. The SVF regime is administered, overseen and enforced by the Hong Kong Monetary Authority (HKMA).
The one-year grace period is due to expire on 13 November 2016, after which it will become a criminal offence to, amongst other things, issue or operate any non-exempt SVFs without a licence from the HKMA. Both existing and new issuers of non-exempt SVFs who have failed to obtain a licence will be required to exit the Hong Kong market before the end of the grace period.
The first SVFs to be licensed under the new regime in Hong Kong are Tap & Go (operated by HKT Payment), Tencent’s WeChat Pay, TNG Wallet, Alipay Wallet (operated by an affiliate of Alibaba) and Octopus & O! e-pay.
What is a stored value facility (SVF)?
Under the Ordinance, a stored value facility is broadly defined as a facility which may be used for storing value of an amount of pre-paid money (or money’s worth), and one that is used as a means of making payment for goods or services, or to make payment to another party. The regulatory regime covers SVFs in physical (e.g. Octopus stored value cards) form and electronic (not including cash, e.g. multi-purpose stored value facilities on mobile networks or online-based accounts).
What SVFs does the Ordinance apply to?
The Ordinance does not apply to single-purpose SVFs. A single-purpose SVF is essentially a facility, which may be used for storing value of an amount of pre-paid money and in respect of which the issuer gives an undertaking that, if the facility is used as a means of paying for goods or services (not being money or money’s worth) provided by the issuer, the issuer:
- will provide the goods or services under the rules of the facility; and
- not give any undertaking either to accept or honour (as applicable) payments from or to another person up to the amount of the stored value that is available for use under the rules of the facility.
Schedule 8 of the Ordinance exempts certain SVFs (including multi-purpose SVFs) from the licensing requirements. This is generally because the user does not need to pay money into the SVF or the usage and risk of the SVF are considered by the HKMA to be somewhat limited. The SVFs which are exempt are:
- SVFs used for certain cash reward schemes where the money stored on the SVF may only be used for making payments for goods or services provided by the issuer or the person under the terms and conditions of the facility. Examples include loyalty schemes provided by retail shops which award cash rewards for customer loyalty.
- SVFs for purchasing certain digital products where (a) the SVF may be used for making payments only for goods or services that are delivered to, and are to be used through, a telecommunication, digital or IT device, (b) the payments are executed through such a device and (c) the telecommunications, digital or IT operator does not act only as an intermediary between the user of the SVF and the provider of the goods or services. Examples include the purchase of digital content such as ringtones, music, videos, e-books, games and apps that can be used on smartphones, computers and other IT devices only.
- SVFs for certain bonus points schemes where the facility is used for storing only points or units (howsoever called) that are money’s worth, which the SVF user may then use to purchase goods or services using only the points or units (or a combination of points and money that is stored on the facility temporarily for the sole purpose of executing the payments). The stored value must not be redeemable for cash. Some examples include airline mileage schemes and customer loyalty schemes that provide non-cash points to customers.
- SVFs used within a limited group of goods or service providers. To qualify for this exemption, the SVF may only be used (a) to purchase goods or services offered by the issuer or some other person with whom the issuer has an agreement and (b) within any of the premises occupied by the issuer. The amount of the facility’s float must not exceed HK$1,000,000 or its equivalent or (if the issuer issues more than one such facility) the aggregate amount of the float of those facilities does not exceed HK$1,000,000 or its equivalent. A store card that can only be used at the store’s premises is an example.
- SVFs used within certain premises. This is similar to the SVFs mentioned in the immediately preceding paragraph because the exact same HK$1,000,000 float thresholds apply. The key difference, however, is that these SVFs would be issued by an issuer under an agreement between the issuer and another person, and the SVFs may only be used to purchase goods or services within any of the premises occupied by that other person. Examples include membership cards where the cards can only be used in the shops or restaurants in a specific club or organisation.
In addition, under section 8ZZZD of the Ordinance the HKMA may from time to time exempt an SVF from the licensing requirements if the statutory criteria are met and where it is satisfied that the risks posed by the facility to the user (or potential user) of the facility and the payment or financial system of Hong Kong are immaterial.
What are the penalties?
A person who issues or facilitates the issue of an unlicensed or non-exempt SVF is liable:
- on conviction on indictment, to a fine of HK$1,000,000 and to 5 years’ imprisonment; or
- on summary conviction, to a fine of HK$100,000 and to 6 months’ imprisonment.
Caroline De Souza
If you would like more information about the Payment Systems and Stored Value Facilities Ordinance or the licensing requirements and application procedure, please contact Eddie Look, Edmond Leung or Tim Drew.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.