Deposit Protection Scheme Bill

Hong Kong Bar Association's further comments on

Deposit Protection Scheme Bill

The Bar has the following comments on the revised Deposit
Protection Scheme Bill:

Client Account Definition

1. In section 2, a definition of "client account" has been added:

"an account maintained by the depositor with a bank
for the purpose of holding money held by the depositor for a client of
the depositor, whether or not other money may be held in the account"

2. A difficulty with this definition is the concept of the account "holding
money" held by the depositor. A bank account is not a depository
or pot of cash. It is a record kept by the bank in which the credits and
debits with respect to the account holder are entered: see e.g. United
Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 at 447F (per Lord Denning

3. Thus to describe a "client account" as an account "for
the purpose of holding money ..." is problematic in law.

Guideline issued under Section 7A

4. Section 7A(5) creates a statutory presumption that
a document that purports to be a copy of a guideline issued under section
7A is a true copy of the guideline in the absence of evidence to the contrary.
It is difficult to see the need for such a presumption.

Section 20

5. Section 20(2) provides that "The Board may place,
or invest, money of the Fund in exchange rate contracts or interest rate
contracts for hedging purposes only". There is no definition in section
2 of:

a. an exchange rate contract;

b. an interest rate contract; or

c. a hedging purpose.

6. These terms may be considered too vague to be used without any express
definitions in the statute. For example, does an interest rate swap fall
within this section? An interest rate swap was described by Lord Goff
in Westdeutsche Bank v Islington LBC [1996] AC 669 at 680B-C as follows:

"Under [an interest rate swap] transaction, one
party (the fixed rate payer) agrees to pay the other over a certain period
interest at a fixed rate on a notional capital sum; and the other party
(the floating rate payer) agrees to pay to the former over the same period
interest on the same notional sum at a market rate determined in accordance
with a certain formula. Interest rate swaps can fulfil many purposes,
ranging from pure speculation to more useful purposes such as the hedging
of liabilities. They are in law wagers, but they are not void as such
because they are excluded from the regime of the Gaming Acts by section
63 of the Financial Services Act 1986."

7. This passage brings out a further problem. Are these exchange rate
contracts and interest rate contracts under section 20(2) of questionable
validity because of their nature as wagering contracts? Should they be
expressly excluded from whatever regime that might invalidate wagering
contracts, like section 63 of the FSA 1986 in the UK?

8. The Bar has considered section 29 of the Gambling Ordinance (Cap 148),
which excludes the application of that Ordinance to "any contract
for differences which is listed on any specified stock exchange, or traded
on any specified futures exchange, within the meaning of section 1 of
Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap 571)".
The Bar notes that a "contract for differences" is defined in
section 2 of the Gambling Ordinance as "an agreement the purpose
or effect of which is to obtain a profit or avoid a loss by reference
to fluctuations in the value or price or property of any description or
is an index or other factor designed for that purpose in the agreement."

9. However, the Bar does not think section 29 of the Gambling
Ordinance completely deals with its concern. For example, for the purpose
of section 20 of the Deposit Protection Scheme Bill, does an exchange
rate contract or an interest rate contract for a hedging purpose amount
to a contract for differences within the meaning of section 2 of the Gambling
Ordinance? Moreover, if the Board enters, for a hedging purpose, into
an exchange rate contract or an interest rate contract which is not listed
on any specified stock exchange nor traded on any specified futures exchange
within the meaning of section 1 of Part 1 of Schedule 1 to the SFC Ordinance,
would such a contract amount to a wagering contract and therefore be void
at common law?

22nd December 2003

Hong Kong Bar Association