Marketing through Third Parties of Instalment Payment Plans involving Pre-payment for Goods or Services

HONG KONG MONETARY AUTHORITY 香港 金 融 管 理 局 Banking Conduct Department RIT 1H FA Our Ref: B9/67C 16 August 2010 The Chief Executive All Authorized Institutions Dear Sir/Madam, Marketing through Third Parties of Instalment Payment Plans involving Pre-payment for Goods or Services

1. Recent cases have shown that, when Als market instalment payment plans for the supply of goods or services (IPP) through third parties at locations other than banks’ branches, such as the premises of merchants, customers may misunderstand the terms and conditions of the IPPs. It is therefore important for Als to make such terms and conditions as transparent and comprehensible as possible for customers to avoid possible disputes when the goods or services contracted for are not delivered as expected.
2. IPPs usually involve prepayment by credit card and may involve goods or services to be delivered by the merchant at a later date. In the case of services, delivery may be over a considerable period. Examples include the provision of services by - health and fitness clubs, educational services providers and travel agents. Disputes may arise when the services contracted for are not delivered for some reason, often because the merchant goes out of business. While disputes are less common with IPPs involving goods, difficulties may also arise when goods become faulty after the merchant has gone out of business but while payments are still outstanding.
3. The terms and conditions of IPPs vary among Als. IPPs are loan agreements between the bank and the customer, under which the bank. advances the pre-paid amount to the customer and pays the full amount to the merchant, while the customer undertakes to repay the amount to 55th Floor, Two International Finance Centre, 香港 中 環 金 融 街 8號 國 際 金 融 中 心 2 期55樓 8 Finance Street, Central, Hong Kong 電話: (852) 2878 8100 3H. (852) 2878 2100 Tel: (852) 2878 8100 Fax:'(852) 2878 2100 電郵: Meena_Datwani@hkma.gov.hk E-mail: Meena_Datwani@hkma.gov.hk 網 址: www.hkma.gov.hk Website: www.hkma.gov.hk

the bank in instalments through their credit card. The outstanding amount .is counted against the credit limit on the customer’s card. Some Als offer the chargeback mechanism for IPPs while others do not. Where the Al does not offer the chargeback mechanism, the pre-paid amount is paid to the merchant more or less immediately or with limited withholding. It is particularly in this type of arrangement that disputes have arisen where merchants have gone out of business before the services contracted for have been fully delivered. When this happens, the risks for the Als are obvious. Not only may Als suffer reputational damage from being seen as colluding with merchants, Als may be inundated with complaints which may adversely affect their operations. Some Als manage their credit risk through chargeback arrangements for IPPs but even this does not ensure the Al concerned will not lose money if there is a mismatch between the period of the chargeback and when a claim is made. Risk Management Measures 5. To manage these risks, the HKMA requires Als offering IPPs to adopt the measures set out below: Documentation 6. The terms and conditions for IPPs should be made readily available to customers or prospective customers in accordance with paragraph 5.1 of the Code of Banking Practice (the Code). The terms and conditions should be drafted in accordance with the Code, in particular paragraphs 5.4,5.7 and 26.1. IPP agreements that are not subject to chargeback protection should be documented through separate and specific terms and conditions, either in A4 format or on a leaflet-type form. The terms and conditions should make clear the following points in plain language and an easily readable font: (a) that the IPP is a loan agreement; (b) that the customer is agreeing to pay for goods or services which may be delivered at a later date; (c) that the instalment amount will be counted against the customer’s credit limit; (d) the repayment obligations of the customer, in particular whether

he or she will be able to stop payment to the AI if the goods or services contracted for are not delivered by the merchant; and (e) that the customer will not enjoy chargeback protection. The items listed in paragraph 7 should be in a prominent position on the front page of the agreement and in an easily legible font. The customer should be required to sign separately against each clause to confirm that he or she has read and understood these conditions. Als should not process IPP applications unless all these signatures are present. The terms and conditions document for IPPs not subject to chargeback protection should also contain a channel for the customer to call the Al from the point of sale so that the ALs staff can answer any questions from the customer and explain the terms and conditions and other payment options. The contact channel may be the telephone number of the ALTs card centre or other enquiry call centre, which should be open 24 hours a day if possible. Als should ensure that staff manning these enquiry lines have copies of the terms and conditions and are able to answer reasonable questions. Managing relationships with merchants 10. 11. Als are reminded that they should have regard to the relevant risk management principles set out in the Supervisory Policy Manual module on Credit Card Business, in particular sections 4.8 and 5.2 when approving new merchants and monitoring their merchant accounts on an ongoing basis. In addition, agreements between Als and merchants regarding IPPs not subject to chargeback protection should require undertakings from the merchant to: (a) make available the terms and conditions of IPPs to the customer at the point of sale and encourage customers to read carefully and ensure they understand the terms and conditions, in particular the points mentioned in paragraph 7(a) to (e), before signing the agreement; and (b) remind customers that they may contact the Al for an explanation of the terms and conditions of the IPP and other payment options and, if they are unable to do so immediately, explain that they may take the terms and conditions away with them and defer signing

until they have been able to speak with the AL Auditing compliance by merchants 12. Als should have arrangements to audit the compliance of merchants with the undertakings mentioned above and any other requirements in the Als’ agreements with them. This may be done by sample checking by telephone with customers who have recently entered into IPPs or by “mystery shopping” arrangements. Where the auditing suggests that a merchant is not fulfilling the undertakings, Als should follow up with the merchant and require it to take remedial measures. If such behaviour continues, Als should consider terminating their relationship with the merchant. Implementation 13. The arrangements set out in this letter, where not already adopted by Als, should be implemented as soon as practicable by Als offering IPPs and in any case no later than 1 October 2010. © Als who have questions regarding this circular may approach their usual contacts at the HKMA. Yours faithfully, Meena Datwani Executive Director (Banking Conduct)