Outside glass view of RPC building.

ADR coming of age for financial disputes in Hong Kong

20 November 2017. Published by Jonathan Crompton, Partner and Maria Petzsch, Registered Foreign Lawyer (England & Wales)

Hong Kong's Financial Dispute Resolution Scheme will be expanded with effect from 1 January 2018 and 1 July 2018 by amending the jurisdiction and terms of reference of the Financial Dispute Resolution Centre (FDRC) .

The amendments, set out in the FDRC's recent Consultation Conclusions (published in August this year[1]):

 

  • double the value of claims that fall compulsorily under the scheme;
  • allow small financial institutions to bring claims as 'eligible claimants';
  • allow parties to use the FDRC by mutual agreement for cases outside the compulsory 'intake criteria'; and
  • add mediation-only and arbitration-only options to the scheme's existing med-arb procedure.

The proposals also include changes to the FDRC's fee schedule to cover its increased workload.

 

Alongside the recent changes to allow third-party funding in arbitration, the changes to the scheme show that alternative dispute resolution (ADR) is coming of age for financial disputes in Hong Kong where there is an imbalance of power between parties.

 

Proposed changes

 

The FDRC is a 'one-stop shop' in Hong Kong for the resolution of qualifying disputes between regulated financial entities and certain of their customers. It was established in 2012, following widespread criticism of the banks and other financial institutions arising out of the financial crisis.

 

The original proposals to enhance the scheme, published in October 2016, invited industry feedback on what would have been extensive changes to the scheme's terms of reference. Most dramatic were plans to increase the maximum claimable amount from HK$500,000 to HK$3 million, as well as to triple the current limitation period (for commencing claims) from 12 to 36 months. Unsurprisingly, these proposals prompted mixed reviews.

 

Notably, the banking and securities sectors resisted a number of the proposals, citing concerns that broader 'intake criteria' (part of the scheme's terms of reference) would risk a flood of speculative claims and complex disputes that the FDRC's mediators might not be equipped to handle. Consumer rights groups and a number of government departments, on the other hand, generally encouraged the proposals to widen consumer access to the scheme. The proposals are aligned with the general trend towards ADR and concerns about the cost of litigation on the public purse, particularly in Hong Kong's lower civil courts.

 

Summary of key consultation conclusions

 

Having considered the wider financial industry's feedback, the FRDC intends to adopt the majority of its proposed amendments to the scheme's terms of reference, albeit with some moderations outlined below. The aim is for most of these changes to take effect from 1 January 2018, with one key change taking effect from 1 July 2018.

 

Eligible claimants expanded to small enterprises


According to the Consultation Conclusions, the scheme will extend to small businesses, including partnership enterprises, private limited companies and, more controversially, financial institutions. This amendment, which will take effect from 1 July 2018, brings the scheme into line with similar arrangements in, for example, the United Kingdom, Canada, Australia, New Zealand and Malaysia, and garnered support from all four chambers of commerce in Hong Kong and the Department of Justice. An eligible 'small enterprise' must be able to demonstrate all of the following in its latest financial statements:

 

  • Its own or its group's annual turnover must be HK$50 million or less;
  • Its own or its group gross assets must total HK$50 million or less; and
  • It or its group must have 50 or fewer employees based in Hong Kong.

The scheme was originally set up to promote access to cost-effective and efficient mediation for individual consumers of financial products, who tended to be less sophisticated or more financially restricted compared with financial institutions. While small enterprises will on the whole be financially better off, the Consultation Conclusions suggest that a key driver is the recognition that (particularly in Hong Kong) many of these entities are also comparatively inexperienced with financial products.

 

The same argument does not automatically apply to small financial institutions, many of which do have a certain level of professional knowledge and financial means, and which will be able to use the scheme as claimant if they fall within the small enterprise criteria. To address this, the relevant scheme mediation/arbitration fees would be shared equally between a qualifying financial institution and the larger financial institution.

 

Maximum claimable amount increased to HK$1 million


The maximum amount claimable by eligible claimants will increase from HK$500,000 to HK$1 million, rather than the proposed HK$3 million. The FDRC will not reconsider complaints brought before the increased limit takes effect. However, to demonstrate the potential scale of increase in eligible disputes, the FDRC anticipates that this amendment will allow it to consider up to 50% of the additional complaint enquiries made to it with respect to claims exceeding the current claim limit (based on the overall number of complaint enquiries received from 2012 to 2015).

 

The single maximum claimable amount will continue to apply for the banking and securities industries.

 

Limitation period extended to 24 months


The time limit for lodging a complaint with the FDRC will be extended from 12 to 24 months, instead of 36 months as originally proposed[2]. The time runs from either the date of first knowledge of loss or of purchase of the relevant financial instrument, whichever is the later. This new period will match the current securities regulation requirement to keep contract notes and other documents for 24 months.

 

Even if the time limit has expired, parties may mutually agree to apply to have their dispute(s) resolved by the FDRC (see below).

 

FDRC will accept cases already in court


From the date of implementation of the amendments, parties may apply to the FDRC even where court proceedings are afoot. To prevent parallel proceedings, however, parties must first obtain a stay or provide formal notification to the court. Subject to meeting the intake criteria of the revised terms of reference, parties to court proceedings to which Practice Direction 31 ("Mediation") applies[3] may also use the scheme and would be able to opt to be legally represented in mediation, which is not normally the case. These are significant changes to the scheme and demonstrate the aim of making the FDRC the go-to ADR centre for all qualifying financial disputes in Hong Kong.

 

Parties able to agree to FDRC for non-qualifying disputes


Eligible claimants whose claims exceed the maximum claimable amount or fall outside the prescribed limitation periods will be entitled to agree with the relevant financial institution to apply to the FDRC for the following types of dispute resolution:

 

  • 'mediation first, arbitration next';
  • 'mediation only'; or
  • 'arbitration only'.

 A separate registration fee and revised fee scale will apply in these cases[4]. This extends the remit of the FDRC to mediate/arbitrate claims worth up to HK$10 million.

 

Financial institutions may, with consent, refer disputes and counterclaims to FDRC


The FDRC will adopt its proposal that financial institutions be able to refer disputes and counterclaims to the FDRC, provided that they have the eligible claimant's consent. This change elicited support across the industry on the grounds that it offers flexibility and fairness to financial institutions in the event that they wish to initiate mediation and avoid otherwise costly disputes. It seems intended to offer even larger financial institutions yet another avenue in the event that their own complaint handling procedures are unable to achieve a settlement. In fact, this also places a further burden on financial institutions to review those procedures, however well-established, to satisfy themselves that customers are in a position to consent to a referral to the FDRC.

 

Reporting obligations


Finally, under the revised scheme, the FDRC will no longer provide detailed case information to the Hong Kong Monetary Authority and the Securities and Futures Commission (two of the lead market regulators in Hong Kong). It will, however, continue to provide monthly reports to the regulators on the number and types of disputes handled, and report suspected systemic issues and serious misconduct. This should provide comfort to regulated financial entities that might otherwise foster concern over whether the FDRC's reporting obligations could prompt more intrusive regulatory investigation. It also maintains the confidentiality of the mediation and arbitration processes, while allowing the FDRC to highlight to the regulators any systemic issues.

 

Comment

 

The effective dates of the amendments are expected to be 1 January 2018 and 1 July 2018 for claims being brought by small enterprises. Disputes where the date of first knowledge of loss or date of purchase of the relevant financial instrument (whichever is later) falls before these dates will remain under the existing scheme. Firm implementation dates will be set out on the FDRC's website in due course.

 

After those dates, the scheme will provide a substantially expanded mechanism for resolving financial disputes in Hong Kong, which will put pressure on the FDRC to deliver adequate resources and expertise[5].

 

The changes will be welcomed by individuals and the increasing number of small businesses in Hong Kong (eg, start-ups) that struggle with whether to bring claims against financial institutions and securities companies. Hong Kong has a financially active population and has seen a steady stream of claims against financial institutions since the 2008 financial crisis. However, recent changes allowing third-party funding were restricted to arbitration and there remain issues with accessing justice. The broadening of the scheme, in particular to allow parties to voluntarily submit their disputes to the FDRC for mediation, arbitration or med-arb for claims worth up to HK$10 million, provides a boost for ADR in Hong Kong and those wishing to avail themselves of its flexibility and options.

 

Financial institutions will be mindful that the number of claims falling under the remit of the FDRC is likely to expand and they will be obliged to accept the FDRC's jurisdiction unless the claim is satisfactorily resolved. Those same financial institutions will now also be able to suggest the FDRC's dispute resolution options to individuals and small enterprises as a way to resolve a dispute quickly and confidentially, and without the regulators becoming aware of the dispute.


First published by the International Law Office on 2 November 2017.



[2] The complaint is known as a FDR Scheme Application Form

[3] Referred to as 'Practice Direction 31 cases' in the Consultation Conclusions. See Part 1(D) of the Consultation Conclusions.

[4] See Part III, Table B of the Consultation Conclusions.

[5] The highest pricing band for 'mutual consent' disputes envisages claims worth up to HK$10 million. Supra note 5.