Financial inclusion denotes banks’ provision of basic financial services at affordable costs to those that need and qualify for them. The opposite is financial exclusion, which is when banks deny financial services to customers that they consider as posing high risks for money laundering and terrorist financing, giving rise to the term “de-risking” or “de-banking”. A litany of financial exclusion reports impelled the Hong Kong Money Authority (HKMA) to issue a circular to banks warning against their practices of de-risking on 8 September 2016. Since then, financial inclusion has become a topic of public interests. The article contains nuanced analyses on the “Bank Account Opening Survey”, first published by the Hong Kong Institute of Chartered Secretaries (HKICS) in September 2016. Thereafter, the HKMA established a dedicated webpage on the topic of bank account opening. The HKICS also conducted a second survey on bank account opening that was published in July 2018. As a result, comments on the HKICS’ bank account opening surveys will consist of two separate parts, as provided below, which are intended to complement each other.
Part I: The HKICS’ “Bank Account Opening Survey” (September 2016) (hereinafter the “2016 survey”) (https://www.hkics.org.hk/media/publication/attachment/PUBLICATION_A_2384_HKICS_Bank_Account_Opening_Survey_report_.pdf)
In the 2016 survey report, the HKICS concluded by suggesting that “98% of respondents stated that companies were having difficulties with opening bank accounts in Hong Kong” (see page 3). The result is in stark contrast to another survey, conducted by the Hong Kong Monetary Authority (HKMA) and based on feedback from Hong Kong’s business community, which suggested that the unsuccessful rate of account opening applications was at 10% in early 2016 but had dropped to around 5% in 2019. The same HKMA survey further suggested that the retail banking sector in Hong Kong was opening an average of some 10,000 new business accounts per month, of which 60 to 70% were for small- and medium-sized enterprises (SMEs) and start-up companies (see HKMA, ‘Tiered Account Services: A New Initiative on Promoting Financial Inclusion’ (12 April 2019) https://www.hkma.gov.hk/eng/key-information/insight/20190412.shtml).
The disparate notions about the difficulty in bank account opening in Hong Kong are intriguing. However, it is the accuracy of the 2016 survey conducted by the HKICS that should be questioned due to the skewed design of certain questions in the questionnaire, which may be regarded as self-reinforcing and capable of distorting the survey outcome. In particular, the 2016 survey raises the concern of negative bias by insinuating from the beginning that the topic of the survey (i.e. bank account opening) is, possibly in the HKICS’ own assessment, already seen as a “problem”. In this regard, please refer to Question 2 (“How serious would you rate this problem?”), Question 3 (“Who contributes to the problem?”) and Question 4 (“What problems are companies encountering when applying to open a bank account?”).
Further comments on the 2016 survey are set out below:
- The survey is limited in scope and, therefore, in accuracy. The reason is two-fold. First, according to the introduction of the survey, a total of 434 respondents participated in the survey, most of whom were people working for corporate service providers (“CSPs”), professional firms and businesses. Although Question 7 of the survey suggests that SMEs and start-ups were most affected by banks’ de-risking practices, the number of respondents working at SMEs and start-ups who may have had direct knowledge about the bank account opening procedures pertaining to them was not specified in this report. In contrast, the number of members working at CSPs (173) and professional firms (70) had been clearly set out under Question 1 of the survey (see page 6, the navy blue and purple shaded sections of the donut chart). This discrepancy leads to the question of how many respondents working in SMEs and start-ups were captured, given that the inclusion of their views would impact, or even potentially alter, the survey results. Second, the introduction of the survey indicates that the questionnaire was sent to members of the HKICS (see page 4). Nevertheless, as of the date of this research, there are a total of 6,455 members with the HKICS (https://www.hkics.org.hk/listMember.php). This means that less than 7% of all HKICS members (i.e. 434) responded to the survey. The limited number of sample responses may not truly reflect the reality of the problem (i.e. de-risking) and therefore should not be taken as a definitive representation of Hong Kong as a whole, due to the risk of over-generalisation.
- Of the 434 respondents, it was suggested that 82% (351) of them had “direct knowledge of the problem, illustrating the robustness of the findings” (see page 8), while 98% (426) of respondents believed that it is difficult to open bank accounts in Hong Kong (see page 6). Yet it is understandable and highly possible that only those individuals with previous experience or preconceived notions regarding the difficulty of opening a bank account in Hong Kong would respond to this survey. As a result, the survey would likely only capture negative responses rather than including the perspectives of those who have had no difficulty at all in opening an account. This factor may account for the high ratio of respondents who said that opening bank accounts in Hong Kong is a challenge (and which in fact is the case, with a 98% majority in this report). A more objective and comprehensive survey would be to involve a survey of the majority, if not all HKICS members, with experience opening bank accounts in Hong Kong.
- Despite the concerns addressed in the first two points above, there is no denying that the 2016 survey represents a fractional view of the HKICS members on the bank account opening situation in Hong Kong at a given time. By way of background, members of the HKICS include people who have roles as company secretaries, governance advisers, non-executive directors, risk managers, and compliance managers, etc. (https://www.hkics.org.hk/page.php?menu_id=2). As the HKICS recruits members with skillsets ranging from the secretarial to the managerial level, rather than the executive level (i.e. directors and chief executive officers), a survey from these professional staff may reflect some genuine responses and feelings about bank account openings. After all, and as a matter of general practice, “company secretaries” are usually in charge of opening bank accounts for SMEs, while “risk managers” and “compliance managers” would act as supervising members who are well-acquainted with and trained to oversee the risk and compliance requirements of opening bank accounts.
- The author believes it is crucial to avoid posing leading questions that could bias survey results. Question 5, which asks “Is compliance used as an excuse to push away smaller revenue generating customers?”, may be considered manipulative. Respondents appear to have been prompted to agree with the pre-existing notion that compliance is an excuse for banks to push away customers with relatively small revenue income. Instead, a more objective approach would have been to first ask “Have you observed any customers who had been turned away by banks because they are small revenue generating?” If respondents have had no previous experience or direct knowledge about the problem described in the question, their proper response would be “no comment” or “not applicable”. The question could be followed by another that might be phrased, “If so, what do you think are the reasons behind this phenomenon?”. Revising these questions could enable surveyees to determine whether the problem of de-risking can be attributed to (a) the bank, which may have found excuses to turn away customers; or (b) the customer, who may have failed to make the minimum deposit amount for opening a business account.
- As noted in one of the respondents’ comments, “(m)ost banks rejected our customers’ application to open an account without giving any reasons. They simply said that it was ‘very unlikely’ the customer would be able to open an account and refused to have a meeting to find out more about the customer” (see page 7). It is unclear whether banks frequently use this excuse to turn away customers. However, it is important to understand that the low level of transparency and clarity given by banks when rejecting a bank account opening application is generally unhelpful to clients from any background, as applicants cannot identify or resolve promptly and accurately issues that may have caused their application to fail.
- In relation to Question 6 of the survey, “[a]re banks imposing collateral conditions to open a bank account?”, it is unclear whether respondents could select more than one of the six options specified under the question, namely (1) high fees; (2) fixed deposits; (3) brokerage accounts; (4) investments; (5) insurance products; or (6) credit facilities. These are options that were imposed or required by banks, in consideration of or in conjunction with bank account opening. Inferring from the total number of responses (430) tallied for these six possible options, it is possible that some respondents had been subject to at least one or more of these conditions while seeking to open bank accounts in Hong Kong. For smaller revenue generating customers/start-ups/SMEs, being required to open and maintain a “brokerage account”, or to utilise their capital to make “investments”, or to pay a sum of “fixed deposit” may hinder the level of financial inclusion accorded to them, even if the amount of money used towards fulfilling these conditions is not astronomical but proportional in size. The collateral conditions imposed by banks may therefore be a contributing factor that leads to financial exclusion in Hong Kong.
- Probing the nature of the problem (i.e. de-risking) posed by banks, “22% (95) of the respondents identified cases in which bank officers told customers not to bother submitting documents. This brings into query bank statistics on the rejection rates of submitted applications which underplays the extent of the problem” (see page 4). To narrow down the issue and further shed light on the above statement, the survey went on to cite the following response by a respondent who said that “(t)he fundamental issue is the severe penalties being imposed by global regulators on global banks which has caused them to overreact. The [complexities] of the regulations are too difficult to be fully understood by the general banking staff who try to act on the safe side to protect the bank and themselves” (see page 6). Drawing on the anti-money laundering and counter the financing of terrorism (AML/CFT) concerns that have been taken into account by banks during the customer onboarding process, the survey poignantly added that “global AML/CFT standards should be consistent, should this be happening?” (see page 3). The top eight banks being named and shamed for contributing to the de-risking problem were HSBC, Standard Chartered Bank, Hang Seng Bank, Bank of China, DBS, Bank of East Asia, Citibank and ICBC (see page 4). Some are global banks; others are local and Chinese banks. Accordingly, the survey concluded in the executive summary that “the problem [of de-risking] is prevalent and not isolated to a few banks” (see page 4). Supposing that the frontline bank staff are those in direct contact with customers as they assist with the customer onboarding process, it is important to determine whether this tier of bank staff is adequately trained on AML/CFT regulations. According to the Guide on Enhanced Competency Framework on Anti-Money Laundering and Counter-Financing of Terrorism, published by the Hong Kong Monetary Authority in 2018 (see https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2018/20180322e1.pdf), the Enhanced Competency Framework (“ECF”), which “features the common core competences required of AML/CFT practitioners in the Hong Kong banking industry”, is “not a mandatory licensing regime” (emphasis added) such that the authorised institutions under the HKMA, including banks in Hong Kong, are only “encouraged to adopt the ECF to the continuing professional development of individual employees” (see paragraphs 1.1 and 2.2 of the Guide on Enhanced Competency Framework on Anti-Money Laundering and Counter-Financing of Terrorism). This statement implies that banks in Hong Kong are not legally bound to provide their employees with AML/CFT training, although most of them probably have provided the required training to fulfil corporate responsibilities. Without adequate training on AML/CFT, it is understandable that frontline bank staff would “try to act on the safe side to protect the bank” (see page 3). More stringent requirements on educating frontline and entry-level bank staff responsible for or assisting with bank account opening applications may help solve or mitigate the problem.
Part Two: HKICS’s “Bank Account Opening Survey—Continuing difficulties in companies opening bank accounts in Hong Kong” (July 2018) (hereinafter the “2018 survey”) (https://www.hkics.org.hk/media/publication/attachment/PUBLICATION_A_2418_HKICS_Bank_Account_Opening_Survey_Report_2018.pdf)
Following the 2016 survey, the HKICS conducted a second survey in which it concluded that there are continuing difficulties in companies opening bank accounts in Hong Kong. With 431 respondents participating in the survey, conducted between December 2017 and February 2018, the key findings, among others, were as follows: (1) 76% (328) of respondents claimed that it had been getting more difficult to open bank accounts in Hong Kong during the 12 months prior to taking the survey; (2) 48% (206) of respondents viewed the difficulties as wide-ranging rather than being confined to one or two major banks; (3) 60% (258) of respondents were not aware of the review mechanisms set up by banks for re-assessing rejected applications for opening bank accounts; and (4) 40% (172) of respondents reported having greater difficulty in opening bank accounts in Hong Kong as compared with other jurisdictions (see pages 3-5, 14). Perhaps more alarming, 68% (294) of respondents took the view that Hong Kong has been losing business opportunities due to the bank account opening issue which is related to and compounded by banks’ de-risking practices (see page 3, 16). These statistical numbers seemed to suggest that banks’ de-risking practices were and still are a serious problem, posing a threat to Hong Kong’s status as an international business and financial centre. While the author acknowledges the contribution of the HKICS in raising awareness of financial exclusion, a problem likely caused by banks’ de-risking practice, the author otherwise has reservations about the survey outcome, which appears to be lopsided and to contain a negative bias. Indeed, some questions in the survey can only lead to a one-sided negative response. To name a few examples: (a) “… has it remained difficult for companies to open bank accounts in Hong Kong, as was revealed in the previous survey? How would you categorise the extent of the problem?” (Question 2); (b) “Have the difficulties been confined to just one or two major banks?” (Question 3); and (c) “What do the difficulties mainly relate to?” (Question 4). All these questions indicate that there are problems. Further, all of these questions are close-ended and self-reinforcing (alluding to the previous unfavourable survey result published in 2016). One can therefore argue that the imbalanced design of these survey questions may have further increased the possibility of a false outcome, rendering the survey outcome inaccurate, or misleading, or both.
Further comments on the 2018 survey are set out below:
- It has been suggested that “the single most common problem cited by 59% (256) of respondents was the difficulty in satisfying the bank’s documentary requirement” (see page 9). Without knowing exactly what documents were asked by banks in each case, it is difficult to verify how significant the problem has been. Standard identification documents include proof of information (such as ID and passport numbers), proof of legitimate source of income and proof of address, all of which are to be supplied by bank customers. The author supposed the situation may have already been improved to a certain degree, given that the HKMA has removed the address verification requirements stipulated in the revised Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for Authorised Institutions) (see HKMA, ‘Guideline on Anti-Money Laundering and Counter-Terrorist Financing – Address Verification Requirements’ (11 October 2017), Ref.: B10/1C, B1/15C, https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2017/20171011e1.pdf). As a result, banks are now only required to obtain information pertaining to the addresses of customers and/or beneficial owners, without having to collect proof from them. This new change will likely have a positive impact on financial inclusion, especially for those SMEs and start-ups that may not be able to produce the business address required, due to the increasingly popular use by SMEs and start-ups of hot desks or co-working spaces (i.e. temporary business centres) as their offices.
- One respondent pointed out that “Due to the higher compliance burden, the relationship managers of banks are reluctant to receive applications from start-ups and SMEs” (see page 9, 2018 survey). In theory, and as recommended by both the local authority (HKMA) and the international authority (the Financial Action Task Force, hereinafter “FATF”), the risk-based approach shall be applied by banks for the purposes of client onboarding and financial transaction monitoring. Considering that many banks have different intelligence teams and functions, an “experience-based risk assessment” has been advocated as a replacement for the “risk-based approach”. It is suggested that the risk-based approach has problems as it highlights potential risks which are more speculative than actual and potentially difficult to determine.
- As indicated in the survey, 41% (176) of respondents noted the difficulties smaller revenue-generating customers face in opening bank accounts (see page 9). However, given the state of impenetration of Fintech in Hong Kong for “know your client-customer due diligence” (KYC-CDD) purposes, banks are understandably reluctant to develop these alternative identification data for customer due diligence (CDD) when dealing with customers who lack standard identification documents or a stable income. Individuals, start-ups and SMEs are cases in point, and from whom banks make little or no money in providing services. Under this circumstance, banks would have to decide for themselves whether or not to bear the cost of using a real-time verification system enabled by Fintech for acquiring and storing customer information, a practice that has been popularised in other jurisdictions such as India where the customer can provide any bank equipped with a biometric fingerprint reader with permission to obtain e-KYC details and get his/her fingerprint captured (See FATF, ‘FATF Guidance Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion with a Supplement on Customer Due Diligence’, Box 13. India-e-KYC process (November 2017) http://www.fatf-gafi.org/media/fatf/content/images/Updated-2017-FATF-2013-Guidance.pdf).
- In terms of the delays caused by banks in processing submitted documents (see page 9), the HKMA has weighed in on this issue and further suggested that, compared with five or ten years ago, the current account opening process is indeed more complex and requires more time. The reason is two-fold. First, concerted international efforts have been stepped up to combat financial crimes such as money laundering and tax evasion, which may by coupled by various sanctions schemes, prompting banks to enhance their AML/CFT controls in general, including imposing a more stringent CDD process for existing and new bank customers. Second, some banks, especially internationally active banks (i.e. global banks), need to comply with not only the local requirements but also the requirements and standards mandated by their head offices or overseas authorities. As a result of the double or triple regulatory commands, the account opening requirements of these banks may therefore vary. A recommended solution, as suggested by the HKMA, is to approach several banks at once to compare and select services that suit the needs of each client. (See HKMA, ‘Account Opening and Maintenance’ (4 May 2020, last revised) https://www.hkma.gov.hk/eng/smart-consumers/account-opening/)
- Some respondents’ comments pointed out that “[b]anks are asking for a very high bank account opening handling fee, as well as annual maintenance fees” and that “[s]ome banks require a minimum deposit of HK$2 million” (see page 11). These complaints could spring into potential disputes for those seeking to open a corporate bank account in Hong Kong. And if the applicant opts to open a corporate bank account with a large bank, application fees “can start at HK$800 and range up to $10,000” which are non-refundable even if the application gets rejected, said Elizabeth Ching, a commentator (Elizabeth Ching, ‘Open a Corporate Bank Account in Hong Kong: 5 Tips for First-Time Entrepreneurs’ (March 2020) https://jumpstartmag.com/open-a-corporate-bank-account-in-hong-kong-5-tips-for-first-time-entrepreneurs/). It is likely true that the applicants may be required to make an initial deposit upon opening a corporate account. Ching cited HSBC as an example which “has an initial minimum deposit of around $10,000, and a monthly minimum balance that can range from $50,000 to $500,000” (Ibid). The wide range of account maintenance fees suggests that the more features the applicant wants for the corporate account, the higher the initial deposit and monthly balance fees will be. Ching further suggested that “[s]ome business bank accounts may also have monthly fees, but these are typically in the $100 range” (Ibid). In this regard, the alleged charge for minimum deposit of HK$2 million, as required by some banks, seems outrageous and atypical, although the allegation is unsubstantiated as there is no public naming and shaming of the bank(s) involved. It is also unclear whether the substantial charge of HK$2 million may in fact concern an unusually extensive list of banking services associated with the corporate account, which may or may not have been applied for.
- There might be a misunderstanding about the HKMA’s regulatory role as some respondents, in expressing their frustration and cynicism towards banks’ review mechanism for re-assessing the account opening application following a banks’ rejection, suggested that “[i]t might be useful if a third-party organisation such as [the] HKMA could re-assess unsuccessful applications. It could then record the case and warn the relevant bank against de-risking, rather than adopting the recommended risk-based approach (see page 12)”. It is worth mentioning that the risk-based approach is recommended by both the HKMA and the FATF for banks in onboarding new clients and monitoring existing account activities. It is a sustainable approach considering that many banks have different intelligence teams and functions. Further, regulators cannot force banks to accept bank account opening applications as the regulatory authority cannot forcibly impose banks to enter into a private contractual relationship with a potential customer. The author would therefore question the practicality of the suggestion put down in page 12 of the 2018 survey, as previously mentioned. Until and unless banks’ de-risking practice cause a systemic risk to the Hong Kong financial system, thereby making it necessary for the HKMA to intervene by engaging in thorough investigations against problem banks and their misconducts, the public naming and shaming of banks that reject certain account opening applications is not feasible, bearing in mind that the actual circumstances may vary from one rejected case to another. It is difficult to generalise banks’ reasons for rejection, since bank account opening decisions may be determined by a complex CDD procedure that is intrinsic to a bank’s internal control and risk management model and the onus should therefore be left on banks to exercise their individual business judgment. It is emphatically true if banks are to onboard clients with less than stellar credit history or worthiness. In these circumstances, the presence of risk factors associated with financial crime does not necessarily mean that potential business would be turned away, because the totality of circumstances (e.g. business models and clientele, project profit and loss, directorship, alternative funding source, expected bank account activities) needs to be considered.
- In responding to the question “[h]ave banks been requiring other conditions before agreeing to open bank accounts?” (Question 5), 33% (141) respondents cited “tie-in sales” as one of the most common conditions (see pages 10 & 15). A case in point is that banks would not accept an open account application unless it is in conjunction with “purchasing insurance or other financial products from the bank, including investments” (see page 10). Note that tie-in sale is an anti-competitive conduct. And the Competition Ordinance (Cap. 619), Hong Kong’s competition law, applies to all financial institutions in Hong Kong (Neil Carabine, Richard Mazzochi, Urszula McCormack, ‘Hong Kong’s Competition Law Now in Force—Tips for Financial Institutions’ (18 December 2015) https://www.kwm.com/en/hk/knowledge/insights/hks-competitio-law-now-in-force-tips-for-financial-insitutions-20151218). Accordingly, the author warns that financial institutions in question may face penalties imposed by competition authority (the Hong Kong Competition Commission) for the anti-competitive conduct affecting those respondents concerned, if the allegation can be substantiated.
- The author appreciates the value associated with open-ended questions. For example, one question asked, “[w]hat issue or issues were particularly relevant to you when assessing whether to open an account in Hong Kong or in another jurisdiction?” (Question 9). In this case, 47% (203) respondents cited “amount of information required” as the most relevant issue, followed by other issues that are relatively less prominent such as “amount of document required” (46%; 199), “processing time” (38%; 165), “fees required” (14%; 61), “other” (non-specified reason) (3%; 14). In addition, 2% (7) of respondents found this question “not applicable” to their decision on bank account opening in Hong Kong (see page 15). Despite the apparent merit of this question, no further details were made available as to ‘what’, ‘which’, ‘how’ and ‘when’ banks had required any relevant (or even irrelevant) information and documents as alleged, making it rather difficult, if not impossible, to distil fundamental values from the 2018 survey.
Due to the absence of a strong methodological underpinning, the author considers both the 2016 and 2018 surveys inconclusive, as they rely primarily on qualitative analyses that are fractional and incomprehensive and lead to disputable survey outcomes. Survey questions that appear to be one-sided and skewed in terms of design may have affected the eventual survey outcomes. That being said, it is highly plausible that the surveys were conducted in good faith and have, to some extent, reflected the views of a fraction of individuals or business entities (i.e. the survey subjects) that had previously been affected by the de-risking practice of banks. To that end, “many of the first-tier banks were singled out to be extremely difficult” (see page 8, 2018 survey and page 4, 2016 survey), referring to some traditional banks in Hong Kong which operate on the brick-and-mortar model. The author envisages that the situation is likely to improve with increased competition from virtual banks in Hong Kong, simply because virtual banks’ main target of business and client base are retail customers inclusive of individuals, SMEs and start-ups, the customer groups adversely affected by banks’ de-risking practices previously. Indeed, recent news reports suggested that Airstar Bank (backed by Xiaomi and AMTD Group) has fully launched its business (see https://fintechnews.hk/12413/virtual-banking/virtual-bank-airstar-fully-launches-in-hong-kong). Meanwhile, Ant Bank has run trials (see https://www.scmp.com/business/banking-finance/article/3078972/five-hong-kongs-virtual-banks-miss-target-launch-date). To this end, the author suggests that the regulator (HKMA) continue monitoring the situation of bank account opening in Hong Kong, as it remains unclear whether the problem of de-risking is a long-term or short-term problem.
This article forms part of the Public Policy Research Project (ID: 2017.A8.064.17C) which was funded by the Public Policy Research Funding Scheme from the Policy Innovation and Co-ordination Office of the Hong Kong Special Administrative Region (SAR) Government. The author is most grateful to the Hong Kong SAR government for their financial support of this project. The author would also like to acknowledge the research assistance of Carmen Yam.