SCMP:Boost investor security without stifling market

24 Jan 2009

It may be premature for most people who face losses on investments in Lehman Brothers minibonds to celebrate a victory for the small handful who have got all their money back. But any breakthrough in the saga over alleged mis-selling of the products as low-risk is welcome news for them. Aggrieved investors could not ask for more than full compensation. The HK$85 million voluntary settlement agreed by Sun Hung Kai
Investment Services for some 300 investors puts pressure on the 21 banks and two other brokerages involved in the sale of the minibonds in Hong Kong. The outcome in this case appears to vindicate the Securities and Futures Commission’s top-down approach of investigating the way institutions sold the minibonds, rather than a protracted case-by-case examination of complaints. Any adverse conclusions about an institution’s conduct can then cover all its affected clients.

Sources said the investment company apparently came forward with the settlement offer, although it has denied any liability or wrongdoing. The company obviously believes it is better to put the matter behind it quickly by settling with its clients than face the prospect of drawn out legal proceedings and the possible loss of its trading licence. In any case, its decision is commendable, as it saves its clients from further anguish and, above all, financial losses. But the real significance of the settlement is to be found in the reasons for a reprimand issued by the SFC over concerns about the way the broker sold the minibonds.

Despite their name, they were not corporate bonds but complex credit-linked instruments. The SFC was concerned about the adequacy of the company’s due diligence, training of sales staff, risk assessment, and record-keeping in relation to the minibonds. The company agreed the concerns were serious.

One question now is whether such shortcomings were prevalent at other institutions that sold the minibonds, mostly banks. It seems unlikely that the SFC’s investigations will find that this is an isolated case.

Another question is whether institutions whose clients make up a higher proportion of the 47,000 investors in HK$15.7 billion of minibonds will be as willing to settle their losses in full.

The SFC does not have the power to impose a settlement. But by publishing the results of its investigations, it does have the power to exercise some moral persuasion. If other institutions find that the concerns in this case have some application to them, they may conclude that the example of Sun Hung Kai is a better way to conclude the affair than dragging it out. It is significant that in announcing the settlement, the SFC dodged the issue of whether claims of mis-selling of the minibonds as low-risk investment products have been substantiated, and Sun Hung Kai admitted no liability or wrongdoing. The terms of the settlement sets a rather appealing precedent for other institutions that are eager to put the matter behind them quickly. Every situation is different, however, so the terms of any settlement could depend on the extent and seriousness of any misconduct. Whatever the terms for each case may be, it is important, and only fair, that even where banks reach settlements with their clients, the SFC will still insist on disclosure of any concerns arising from its investigations.

The financial secretary has called for a review of regulations after receiving reports on the minibond affair from the SFC and the Hong Kong Monetary Authority, which regulates banks. For the sake of confidence in our financial system, the government must move swiftly to enhance investor protection without stifling a free market.