10 Jan 2009
Enoch Yiu and Maria Chan
The Hong Kong Monetary Authority told banks yesterday to implement seven consumer protection measures concerning the sale of investment products, and to formulate plans to separate their deposit-taking and retail securities business before the end of March.
The measures are part of a range of proposals suggested in separate reports disclosed on Thursday by the authority and the Securities and Futures Commission on last year’s Lehman Brothers minibond fiasco. On the same day, Financial Secretary John Tsang Chun-wah ordered “an immediate review” of Hong Kong’s financial regulatory structure.
The authority sent a circular to all banks yesterday requiring them to immediately add “health-warning” statements to their sales material on retail derivative products to warn of their risks. It told them to immediately introduce adequate controls to ensure sales staff were not solely rewarded for sales performance.
By the end of March, banks must instal audio systems to record client conversations on investment products sales, as well as introduce a “mystery shopper” programme – in which undercover staff monitor the behaviour of those selling investment products.
In addition, the authority told banks to formulate plans to separate their deposit-taking and investment products sales functions. Both reports said it was a conflict for bank tellers to handle deposits and sales. But the regulators have different ideas on how to solve the problem.
The authority report said banks should use separate counters and staff in a branch to sell investment products. But the SFC suggested banks be banned from using their branch networks at all for these financial instruments. Rather, they should set up a separate subsidiary, using different offices and staff.
The proposed reforms come in the wake of the collapse of the US bank Lehman Brothers in September, a crisis that left 43,700 Hong Kong investors holding derivatives it issued or guaranteed, but which had lost much or all of their value.
Many claimed they were misled by bank tellers, who sold the products as alternatives to time deposits or low-risk bonds when, in fact, they were risky credit-linked derivatives.
Raymond So Wai-man, an associate professor of finance at Chinese University, supported the idea that banks should separate deposit-taking and investment products sales.
“When bank tellers make use of depositors’ financial information and cross-sell them investment products, customers may be confused between investment and deposit taking,” he said. Peter Wong Tung-shun, chairman of the Hong Kong Association of Banks
But Peter Wong Tung-shun, chairman of the Hong Kong Association of Banks, said some banks were very small and it might not be easy to have separate counters.
Mr Wong said banks might face higher operating costs after adopting the suggested proposals. “It’s hard to say whether banks have to pass on the cost to consumers,” he said.
The authority and the SFC reports both noted that Britain, Singapore and Australia had “cooling off” periods of 14 to 30 days on some investment products in which customers can change their minds.
In Hong Kong, there is no such cooling off period. However, the Hong Kong Federation of Insurers does have a cancellation period in which customers can cancel their policies up to 21days after applying.
Chan Kin-por, lawmaker for the insurance sector, said this had helped to reduce complaints. He said 10 to 15 per cent of policies sold were cancelled in the cooling off period.
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