Hong Kong

David Smyth and David Luk of Smyth & Co (in association with Reynolds Porter Chamberlain LLP), review Hong Kong’s new Financial Dispute Resolution Scheme and highlight some pertinent issues that may arise for prospective claimants, financial institutions and their in-house lawyers.


Hong Kong’s new Financial Dispute Resolution Centre (FDRC) has a new Financial Dispute Resolution Scheme (FDRS), to encourage mediation or arbitration of individuals’ claims against certain financial institutions. However, the FDRS is not without concerns for both retail investors and financial institutions regulated by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC). In particular, in-house lawyers at financial institutions will want to compare the FDRS to more informal and quicker settlement options with which they are already familiar. As is often the case, “the devil is in the detail”.

FDRC – some key points
• An individual has to give written notice of his or her claim to the financial institution and give it at least 60 days to reply or receive a final written reply, before filing a claim with the FDRC.
• To be accepted by the FDRC, the claim must be an “eligible claim”. If accepted by the FDRC, the FDRS is triggered.
• At the risk of over-simplification, an “eligible claim” is one that (among other things) arises out
of a financial service provided by a financial institution regulated by the HKMA or the SFC. The individual or sole proprietor must have had a “customer relationship” with, or been provided with a financial service by, the financial institution (Annex II of the FDRC terms of reference).
• The monetary value of the claim must not exceed HK$500,000 (or the foreign currency equivalent), including interest.
• If the FDRC accepts the claim, the dispute can proceed to a form of “med-arb”; a form of mediation which (if the claim is not resolved) can proceed to arbitration.
• Once the claim is accepted by the FDRC the FDRS is triggered and the financial institution is obliged to accept the FDRC’s jurisdiction, unless the claim is satisfactorily resolved.

FDRS mediation – a summary
• The mediation is conducted under the FDRS Mediation Rules (Annex IV of the FDRC terms of reference).
• A single mediator is chosen from a list of mediators kept by the FDRC.
• Mediators on the FDRC approved list are bound by the FDRS Mediation Rules and the Ethics Code (Annex V).
• The mediation will normally be limited to four hours.
• The mediation fees are relatively inexpensive with the financial institution paying the much larger share (Annex 1).
• FDRS mediations are facilitative only. The mediator does not have power to make a monetary award.
• The outcome of the mediation, or FDRS Mediated Settlement Agreement, does not establish liability or fault on the part of any of the parties, beyond the enforcement value set out in the settlement agreement.
• While parties are entitled to take legal or expert advice with respect to their rights, legal fees will not be recoverable as part of a mediation.
• A party may be accompanied by one or more persons who are not their legal representatives to assist and advise them during the mediation. However, legal representatives (including in-house lawyers) will not be allowed to attend a mediation (FDRS Mediation Rule 2.3.3).


FDRS arbitration – a summary
• If a dispute is not resolved by mediation, the claimant can
make a written request to proceed to arbitration.
• The arbitration is conducted under the FDRS Arbitration Rules (Annex IV).
• A single arbitrator is chosen from the FDRC approved list and is bound by the FDRS Arbitration Rules and the Ethics Code.
• The arbitration will usually be “documents-only”.
• An “in-person” arbitration hearing will only be allowed if the arbitrator decides that is necessary and the parties are willing to pay the extra FDRC fees.
• The arbitration fees are significantly cheaper than commercial arbitrations.
• An arbitrator may permit legal representation at an “in-person” arbitration. In that event, recoverable legal costs cannot exceed HK$25,000.
• An arbitration award cannot exceed HK$500,000 (inclusive
of interest).
• An award is final and binding and can only be appealed in very limited circumstances.

FDRS – nothing to fear?

• Confidentiality
While the FDRS mediation and materials are confidential, a mediator can send a Mediated Settlement Agreement (if concluded) to the HKMA or the SFC and the FDRC. An arbitrator can send a FDRS Arbitration Award (if concluded) to the HKMA or the SFC via the FDRC. In cases where the financial institution expects a wave of similar or related claims, this raises concerns for the institution. Financial institutions are likely to turn to their in-house lawyers for advice.
• Pool of suitable mediators/arbitrators
It is important that the FDRC cast its net wide for suitable talent but not at the expense of diluting quality. The choice of mediator or arbitrator is often crucial; particularly, if there is only one.
• “Better the devil you know?”
While it is still early days, looking ahead, one can envisage certain types of claim in which a financial institution decides it is better to settle rather than proceed to a FDRS mediation. Again, financial institutions are likely to turn to their in-house lawyers for advice.
• Legal representation
The prohibition on lawyers (external advisers or in-house) attending mediations is designed to encourage an “equality of arms” and to prevent the mediation process being “over-lawyered”. However, as a result, much time and internal resources within a financial institution may be taken up with the preparation for a mediation or arbitration.
• The wrong focus?
Concerns have been expressed that there is a danger of too much focus being directed towards the mediation process at the expense of the parties’ interests.

david.smyth@smythco.com.hk
david.luk@smythco.com.hk
www.smythco.com.hk

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