Octopus Cards Ltd

Last week I read Next Magazine (#932) and found a short comment from the column 中環人語 talking about Octopus Cards Ltd (OCL). The author said OCL, as a "Restricted Licence Bank" (RLB), is not complying with the banking regulations when issuing the Octopus cards to the cardholders (as depositors), including:

• Taking only deposits with a minimum amount of HK$500,000;
• Taking only fixed deposits; and
• Performing adequate know-your-client (KYC) procedure on the cardholders to prevent money laundering.

Then the author (who is used to critizing HKMA) concluded that HKMA (led by Mr Joseph Yam) is not enforcing the law. If you are a laymen of Hong Kong banking regulations (like most of the other citizens), you may think that the author's allegation is valid. Unfortunately, in fact the author is the same as you but being a laymen he dared to mislead you. Nevertheless, by exercising common sense, you may wonder how could HKMA make such an obvious and serious mistake? Let me point out the flaws in the short comment.

First of all, OCL is not a RLB, but a deposit-taking company (DTC). Banking Ordinance requires a DTC to take only deposits with a minimum amount of HK$100,000 (instead of HK$500,000) and a minimum maturity of 3 months. OCL has definitely been exempted by HKMA from following these restrictions, so that you don't need to deposit HK$100,000 to obtain a Octopus card and you can "withdraw" your deposit (by using the card for spending) at any time. Where is the legal basis?

You can find the answer from Chapter 10 of the Guide to Authorization issued by HKMA. OCL is not a normal DTC, but only authorized by HKMA as a special purpose vehicle (SPV) DTC whose principal businss is the issue of multi-purpose stored value cards (i.e. Octopus cards). Such a SPV DTC should be subject to a condition of authorization that it will not engage in other types of deposit-taking or lending business. Considering the nature and purpose of Octopus cards, it is self-defeating to impose the requirements of minimum deposit size and maturity on OCL. Simplifying the KYC procedure is also acceptable because the maximum amount that can be stored on the Octopus cards is quite small. How could money laundering happen by using such a payment tool?

I don't know if the author has consulted any legal or compliance practitioner before making this unsubstantiated comment. But I strongly recommend HKMA or OCL to issue a letter to Next Magazine for clarifying the actual compliance issues.