Safety net unlikely for structured products

Structured deposit products, which have become popular in recent years, are unlikely to be covered under the Deposit Protection Scheme (DPS) which is due to introduced in the second half of next year, according to market watchers.

Raymond Li Ling-cheung, chief executive of the Hong Kong Deposit Protection Board, said it still had to consult the banking industry and the Consumer Council.

'We have two proposals. The first is to just include products with principal guaranteed; the second is to exclude all the structured deposit products.' The DPS will insure customer deposits of up to $100,000 against loss while up to 84 per cent of depositors can be covered if a bank collapses.

The record-low interest rates of the past few years opened the window for the emergence of exotic structured products, such as equity-linked notes and credit-linked notes, to which customers turned to improve the yields on their deposits. But it also left the banks, their customers and the industry regulator to puzzle over whether structured deposits are deposits or investments.

It is estimated that structured deposit products account for 2 to 5 per cent of Hong Kong lenders' total deposits of $3.8 trillion.

Mr Li said the amount invested in such products was usually well above the protection ceiling of $100,000, so whether or not they were included would not have a significant impact.

However, if they were included, banks would have to seek legal advice over the deposits-versus-investments issue which could mean additional operating costs that might be passed on to the customers, he said.

Stanley Wong Yuen-fei, a director and deputy general manager at ICBC (Asia), said: 'The purpose of the DPS is mainly to protect small investors and usually the amount invested in such products is higher than the protection ceiling of the scheme, so it doesn't make much different whether such deposits are covered or not,' he said.