SCMP:Repairing the damage

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5 Nov 2008
Joseph Wong Wing-ping, formerly secretary for the civil service, is an adjunct professor at Chinese University of Hong Kong

Last Friday, the Hong Kong Monetary Authority (HKMA) announced it had made available mediation and arbitration services to help resolve compensation issues between investors in Lehman-related products and distributing banks. The Hong Kong International Arbitration Centre will provide the service. The HKMA will co-ordinate referrals.

So far, the HKMA has referred 72 cases to the Securities and Futures Commission (SFC). This number is expected to rise, given that of some 14,000 complaints received by the authority, only 37 have so far been found to be unsubstantiated.

More than 40,000 investors purchased Lehman products involving a total sum of about HK$15.6 billion. Most feel that the banks misled them on these "low-risk" products. Political parties have united to demand compensation from the banks. The matter has become political dynamite and a serious threat to social harmony. Yet, given the complexity of the issue, there is no sign of an early resolution.

To the government's credit, it has taken action. Apart from the offer of mediation and arbitration services, it has secured the banks' agreement to buy back the defunct Lehman products based on the value of the related collateral. The government has also pledged to provide unlimited financial support to the Consumer Council's Consumer Legal Action Fund, so it can take action against the banks where complaints are justified. The council has already selected some 50 cases for further analysis. But more needs to be done if the government wants to demonstrate compassion and fairness in handling the matter.

First, it should draw some lessons from what is happening in Singapore in handling the same problem. Like in Hong Kong, the Singaporean government has urged the distributing banks to discuss and, where appropriate, reach a settlement with clients. But it has gone further, by advising the banks to repay the principal amount in full to those investors aged above 62 (the official retirement age in Singapore) and with less than secondary-school education, on the grounds that these complicated products should not have been sold to them. In Hong Kong, thousands of poorly educated elderly people have lost substantial savings in the Lehman products.

They deserve our compassion and extra help from a government that has pledged to care for the elderly and disadvantaged. If the banks continue to play it by the book, our government should ask the Consumer Council to proceed with the legal cases involving the disadvantaged elderly with the utmost speed.

Second, the government should complete its own review of the respective roles of the SFC and HKMA as soon as possible. Pertinent questions need to be answered. For example, why were these products allowed to be sold to small investors when similar products were only available to institutional investors in the US? Why were they allowed to be named " minibonds " when our chief executive has remarked openly that he did not think they were genuine bonds? Did the HKMA exercise due diligence to regulate the banks? If so, why did the banks sell these products to so many less-educated elderly?

If the government was at fault, it would be better for the chief executive to admit it and make amends, rather than for the Legislative Council to come to the same conclusion after a tortuous investigation. Many people say that taxpayers' money should not be used to bail out losing investors. But, if the government was negligent in its duties, it owes the aggrieved parties an apology or even compensation.

Third, despite the availability of the mediation and arbitration service, the government should encourage the Consumer Council to select a full spectrum of cases, to ensure that the judgments can have a binding or guiding effect on other, similar cases.

Fourth, it is right to use public funds to uphold social justice. The Legal Aid Department handles many cases where the government is the respondent or defendant. The government should, therefore, make it clear that any legal cases taken up by the Consumer Legal Action Fund should not be so limited in scope as to exclude the possible liability of the HKMA and the SFC.

The disputes surrounding the Lehman products have all the attributes of a political storm that may blow some officials away in the government. The recent announcement by one bank that most of its Lehman-linked products are now worthless has driven more investors onto the streets. I am not hopeful that, when banks eventually announce the buy-back value of the minibonds , they will reduce the tension. I fear the opposite.

Many of the elderly buyers of Lehman products are exhausted, desperate and vulnerable. It is important for the government to seize the initiative and take further action; it risks paying a high price if it fails to do more promptly.