Hong Kong Law Reform Commission

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Chapter 1 - Debt collection in Hong Kong

Introduction

Industry overview

Introduction

1.1 It is a fundamental precept in our society that individuals should honour their debt obligations. Yet, it is equally important that debtors and members of the public generally should be protected by law from debt collection methods that overstep the bounds of acceptable pressure.

Statistics on personal credit delinquency

1.2 According to data published by Credit Information Services Ltd (“CIS”),[1] the total number of records of personal credit delinquency reported to it rose from a total of 58,792 during the second half of 2000 to 69,208 during the first half of 2001, representing an increase of nearly 17.7%. The figure further rose to 105,815 during the second half of 2001, representing an increase of 53%. Details are given in the following chart:

1.3 Statistics compiled by CIS also showed that the total number of users of consumer credit reported as failing to meet their debt repayment obligations rose from 13,011 during the second half of 2000 to 17,149 during the first half of 2001, representing a growth rate of nearly 31.8%. The figure for the second half of 2001 rose further to 39,115, representing an increase of 128%. The table below shows the details:

No. of loans carried by single consumer & being reported delinquent	No. of Consumers Being Reported Delinquent
	2H 1997	1H 1998	2H 1998	1H 1999	2H 1999	1H 2000	2H 2000	1H 2001	2H 2001
	Individual	Individual	Individual	Individual	Individual	Individual	Individual	Individual	Individual
1	15,502	10,451	14,180	18,400	7,499	4,957	4,589	7,099	14,511
2	4,877	2,411	4,521	7,954	3,052	2,177	1,957	2,613	5,982
3	856	1,220	2,306	4,699	1,647	1,405	1,420	1,547	3,890
4	257	654	1,177	3,039	1,317	1,010	874	1,104	2,696
5	99	311	721	2,089	975	765	698	881	1,980
6	46	175	407	1,470	670	614	592	664	1,609
7	11	125	250	1,071	602	517	486	496	1,386
8	11	70	200	743	471	370	385	476	1,111
9 or above	4	156	471	3,008	2,333	1,870	2,010	2,269	5,950
Total no. of consumers being reported delinquent during the period	21,663	15,573	24,233	42,473	18,566	13,685	13,011	17,149	39,115
Total no. of delinquent records being reported during the period	29,734	26,946	45,494	132,947	73,597	58,145	58,792	69,208	105,815
Average no. of delinquent records per consumer	1.37	1.73	1.88	3.13	3.96	4.25	4.52	4.04	2.71

Statistics compiled by the Police

1.4 Statistics compiled by the Hong Kong Police on reports it receives from the public relating to debt collecting activities show an increase in non-criminal reports and a decrease in criminal reports. As can be seen from the chart below,[2] the number of crime reports has continued to decline since 1999, from 3,420 cases in 1999 to 2,498 in 2000, and to 1,959 cases in 2001. On the other hand, non-crime reports have been on the increase,[3] suggesting that the problem of harassment type collection tactics is worsening.

1.5 In 2001, criminal damage accounted for a majority (1,497 reports, 76.4%) of the 1,959 crime reports received. These crimes were usually in the form of splashing paint and jamming of door locks with glue at the victims’ addresses. Criminal intimidation / blackmail (261 reports, 13.3%) came second and were usually committed by way of verbal abuses through the use of telephones. The remaining 201 reports (10.3%) involved assault, arson, false imprisonment, robbery / theft or other crimes. A breakdown of the crimes committed is shown in the table below:

Crimes Committed (2001)	No. of Reports	Percentage
Criminal Damage	1,497	76.4%
Criminal Intimidation / Blackmail	261	13.3%
Assault Occasioning Actual Bodily Harm / Wounding	90	4.6%
Arson	41	2.1%
Others	35	1.8%
False Imprisonment	23	1.2%
Robbery / Theft	12	0.6%
Total	1,959	100.0%

1.6 Among the 13,353 non-crime reports recorded in 2001, 32.6% of the cases involved unknown creditors: either because the debtor could not be located or was uncooperative, or because several loans were owed to different creditors. The remaining non-crime reports were mostly linked to loans made by finance companies, individuals, commercial companies, credit card companies, banks and Macau loansharks. Details can be found in the table below:

Non-crime Reports (2001)

Creditors	No. of Reports	Percentage
Unknown Creditors	4,354	32.6%
Finance Companies	2,612	19.6%
Individuals	1,393	10.4%
Commercial Companies	1,380	10.3%
Credit Card Companies	1,300	9.7%
Banks	931	7.0%
Macau Loansharks	991	7.4%
Telecommunication Companies	264	2.0%
HK Loansharks	75	0.6%
Cross Border Trade	53	0.4%
Total	13,353	100.0%

1.7 The harassment tactics commonly employed against debtors, and innocent third parties such as friends, loan referees, family members or business partners are shown in the table below:

Harassment Tactics (2001)	No. of Reports	Percentage
Telephone Nuisance (making numerous dunning telephone calls, sometimes during the early hours in the morning)	4,793	35.9%
Visit (making repeated visits to the debtor’s / victim’s home or office)	4,188	31.4%
Others (sending numerous dunning letters, posting of debt collection notices outside the debtor’s address to cause embarrassment)	4,326	32.4%
Minor Assault	46	0.3%
Total	13,353	100.0%

Statistics compiled by the Hong Kong Monetary Authority

1.8 The Hong Kong Monetary Authority has compiled statistics on abuses in connection with debt collection reported to its debt-collection hotline, which was set up in April 1996 to provide advice to complainants. The chart below shows the total number of complaints received in each year, and the number in respect of the different types of complaints. Except for the year 1999 during which there was a marked decrease in the number of complaints, the number of complaints each year rose from over 200 in 1996 and 1997 to over 400 in 2001. The number of nuisance and intimidation complaints have risen while that of violence complaints have remained generally stable.

	Nuisance[4]	Intimidation[5]	Violence[6]	Posting Notice[7]	Total
1996[8]	200	70	10	2	282
1997	179	31	8	0	218
1998	245	46	10	0	301
1999	127	35	8	0	170
2000	252	66	21	0	339
2001	296	126	9	0	431
	1,299	374	66	2	1,741

1.9 A breakdown of the complaints according to the status of the complainants is shown in the chart below. In 1996, the majority of complaints were made by third-parties, including family members, friends and un-related parties. In 2001, however, the majority of complaints were made by debtors. This is due to an almost three times increase in debtors’ complaints since 1996. The number of complaints made by referees have decreased.

	Debtors	Family members or friends of debtors	Non-related parties[9]	Referees	Total
1996[10]	95	147	18	22	282
1997	104	98	12	4	218
1998	173	105	19	4	301
1999	108	57	4	1	170
2000	231	83	23	2	339
2001	272	119	37	3	431
	983	609	113	36	1,741

Statistics compiled by the Privacy Commissioner for Personal Data

1.10 The Privacy Commissioner for Personal Data (“the Privacy Commissioner”) also receives complaints concerning debt collection activities. In the period from 20 December 1996 to 31 December 2001, the Privacy Commissioner received a total of 2,783 complaints of suspected breaches of the Personal Data (Privacy) Ordinance (Cap 486). Of these, 325 complaints involved practices of debt collection activities. The following table gives a yearly breakdown of the figures.

	Debt collection Complaints	Total Complaints	Percentage (%)
1996-1997	20	237	8%
1998	44	392	11%
1999	52	541	10%
2000	103	692	15%
2001	106	921	12%
Total	325	2,783

1.11 Malpractices alleged by complainants included the following:

Sending of unsealed correspondence concerning debts.

Posting up of demand letters in public places.

Posting up of copies of the debtor’s identity card in public places.

Mailing or faxing of demand notices to the debtor’s employer or neighbours.

Demanding repayment of a debt from person who is neither the debtor nor a guarantor.

Abusive and threatening messages.

1.12 The Privacy Commissioner observed that complaints about debt collection activities engaged by mobile service operators have increased, and the majority of these complaints concerns the transfer of disputed overdue payments to appointed debt collectors.

1.13 It is worth mentioning, however, that of the 325 complaints, only 58 cases were found to have sufficient evidence to establish a breach under the Ordinance. So far, the Privacy Commissioner for Personal Data have issued 24 warning letters and one enforcement notice in relation to cases that were found in contravention of the Ordinance.

Industry overview

1.14 The debt collection industry in Hong Kong comprises a wide spectrum of market operators, including international and local agencies. There are also poorly managed and unscrupulous agencies some of which employ people who have, or claim to have, triad backgrounds.[11] There are no official statistics on the number of debt collection agencies operating in Hong Kong. According to one collection agency, there are now approximately 100 to 150 collection agencies, with five to ten major players. Another source believed that there are about 30 active collection agencies of which not more than six are generally considered well-managed and sizeable with over 50 members of staff.

1.15 The top end of the debt collection industry is run in a professional and ethical manner. These agencies usually have many years of experience and have goodwill to protect. Strict policies are developed in matters of recruitment, training, supervision, and the handling of complaints. Stringent and detailed codes of practice for collection are also laid down for the collection staff, covering different aspects of debt collection including the manner in which telephone calls and personal visits should be conducted, the contents and signing authority of demand letters, the way in which payments made by debtors should be handled, and the obtaining and security of personal data.

1.16 The success rate of these well-managed debt collection agencies is generally not very high. One established debt collection agency stated that its successful collection rate is about 20% and 10% for telecommunications assignments and bank/finance assignments respectively.

1.17 The debt collection business has undergone rapid growth and changes in recent years. This is linked to the fact that in Hong Kong, as in other advanced economies, the extension and use of consumer credit have increased substantially. As at the end of 1996, consumer debt[12] extended by the banking sector[13] stood at HK$126,839 million. The figure grew to HK$151,021 million as at end of September 2001. On credit card debt alone, the figure increased to HK$53,007 million as at end of September 2001.

1.18 According to unofficial estimates[14] the number of credit cards in circulation in Hong Kong in September 2000 amounted to 9.7 million, out of which 6.7 million were issued by authorized institutions.[15] By end of 2001, the number of credit cards issued by authorized institutions had increased to 9.2 million. The default rate of repayments has increased since the economic downturn in late 1997. Figures collated by the Hong Kong Monetary Authority for the quarter ending December 2001 revealed a rise in the annualised charge-off ratio[16] to 8.27% from 5.33% in the previous quarter.[17] According to the Hong Kong Monetary Authority, the worsening of the figures reflects a deterioration in the quality of credit card portfolios, relating in particular to the sharp rise in personal bankruptcies.[18] Nevertheless, due to intense competition, banks are still actively promoting their credit card business by means of gifts and other incentives, and new credit cards are issued by banks largely without knowledge of the number of other credit cards already held by their customers as complete information on this is currently not available to them.

1.19 Another reason suggested for the rapid growth of the debt collection industry is that since June 1991, debtors could no longer be imprisoned for non-payment of debts following the enactment of the Bill of Rights Ordinance (Cap 383).[19] Accordingly, whereas creditors relied mainly on the court system to recover debts in the past, they had relied more on extra-judicial means of debt recovery after the enactment of the Hong Kong Bill of Rights Ordinance (Cap 383).

1.20 A consumer’s failure to repay a debt may arise from a variety of circumstances. In some cases a consumer may deliberately try to avoid repayment. In others, default arises from over-commitment or changes in financial circumstances resulting from unemployment, business failure, health problems or divorce. Default may also arise because of dispute as to the validity or amount of the debt. A study[20] found that the causes of default included initial misjudgement of the ability to repay, the incurring of additional obligations, extravagance by the debtor and, in some cases, plain dishonesty.

[1] Credit Information Services Ltd is Hong Kong’s main consumer credit bureau and its business is to maintain credit information database and to provide consolidated credit reports on individuals to its members for credit evaluation. Its members are mainly comprised of banks and major financial institutions.
[2] Compiled by the Organized Crime & Triad Bureau of the Hong Kong Police in October 2001.
[3] Debt collecting related reports, including non-crime reports, have shown a substantial increase as a result of ‘new data capture procedures’ implemented since December 1998.

[4] Nuisance – such as phone calls using foul language, persistent phone calls, anonymous phone calls, phone calls at unreasonable hours, frequent visits, pestering the debtor’s referees, family members, friends, employer, or colleagues for information about the debtor’s whereabouts, putting up posters/writing on the walls (i.e. spray paint) in the vicinity of the debtor’s residence.

[5] Intimidation – such as making abusive or threatening remarks to the debtor/the complainant (e.g. threat to set fire, threaten the complainants’ personal safety, etc).

[6] Violence – such as jamming the door lock, kicking the door or gate with great force.

[7] Posting notice to publicise the debtor’s indebtedness in the vicinity of the debtor’s residence or workplace.

[8] Covering April – December only since the hotline was established in April 96.

[9] Non-related parties include ex-tenant, ex-resident, debtor’s employer or colleague.

[10] See foot-note 8 above
[11] According to Police figures 41 ‘improper’ debt collection agencies were identified in 2001.
[12] Consumer debt here refers to loans incurred by private individuals and professionals in relation to credit card and for other purposes, but excluding those in relation to the acquisition of residential properties.
[13] i.e. Authorized institutions as defined in the Banking Ordinance (Cap 155).
[14] Banking World, Sept 2000 issue, Hong Kong Institute of Bankers.
[15] As defined in the Banking Ordinance (Cap 155).
[16] Charge-off ratio refers to the total amount of credit card receivables written off during a period as a percentage of the total credit card receivables at the end of that period. The charge-off policy may vary among authorized institutions. Normally, an account will be written off when the receivable has been overdue for more than 180 days or when the ultimate repayment of the receivable is unlikely (e.g. the cardholder is bankrupt or cannot be located). To facilitate comparison among authorized institutions (especially for those which may provide charge-offs at different intervals during the year), the charge-off ratio is annualised.
[17] For the quarter ending December 2000, March 2001 and June 2001, the figures are 3.71%, 3.68% and 4.6%.
[18] However, the figures have also been affected significantly by changes in the charge-off policy of a number of institutions which are now charging off bad debts earlier than before, in particular when a bankruptcy petition is presented rather than when a bankruptcy order is made. Without the change, the charge-off ratio would have been slightly under 7% for the December 2001 quarter.
[19] By the enactment of the Hong Kong Bill of Rights (Cap 383) on 8 June 1991, certain provisions of the International Covenant on Civil and Political Rights were incorporated into the law of Hong Kong. By virtue of Article 7, no one shall be imprisoned merely on the ground of inability to fulfil a contractual obligation.
[20] Australian Law Reform Commission, Report No. 36.