SCMP:Minibond deal raises pressure for more refunds

24 Jan 2009
Joyce Man Additional reporting by Maria Chan, Enoch Yiu and Albert Wong. Source.

More institutions and banks were likely to consider compensating minibond investors after Sun Hung Kai Financial announced it would offer full refunds, a knowledgeable source said yesterday. But the source said they would each propose a deal on their own terms.

“ I think they will see what has happened with Sun Hung Kai and realise it’s a quick, better way to put this behind them,” said the source, who did not want to be named.

Sun Hung Kai Financial, parent company of Sun Hung Kai Investment Services – which sold minibonds linked to Lehman Brothers, the US investment bank that collapsed in September – announced on Thursday it would buy back minibonds from 310 customers for about HK$85 million.

At the same time, the Securities and Futures Commission raised concerns about Sun Hung Kai Investment Services’ due diligence, salesstaff training, risk assessment and record-keeping on minibonds. Minibonds are not corporate bonds but consist of high-risk credit-linked derivatives, marketed as a proxy investment in well-known firms.

Asked whether other banks might respond with compensation of 70, 80 or 90 per cent of original investments, the source said that would “depend on how serious [the commission’s] concerns are about the conduct”.

But the commission had no authority to force this on them, the source said. A spokeswoman for the Monetary Authority, which regulates banks, also said it could not do so.

The source said the deal on Thursday proved the efficacy of a top-down approach, under which the commission investigated whole institutions, not individual complaints.

Secretary for Financial Services and the Treasury Chan Ka-keung said Sung Hung Kai Financial’s repurchase offer proved the commission’s investigation was effective in protecting investors’ interests. He would not say if he thought other banks would be pressured into following suit, only that he believed the commission and the Monetary Authority would be fair in their investigations.

A banker who asked not to be named said the settlement would put pressure on banks as investors would have high expectations. However, the banker said the top-down approach the SFC used had its drawback as banks would have to compensate all customers if the SFC found they had systematic problems in selling investment products.

“It’s unfair if we have to pay for all customers unless the systematic problem is very big,” the banker said, adding that it was hard to judge how big the problem would need to be to warrant compensating all customers.

Another banker expected there would be more pressure for banks to reach a similar agreement with the SFC. But he believed few would strike deals.

“It is not because the amounts of minibonds sold by banks are bigger; the major reason is that it’s unreasonable. We only compensate customers if we are wrong.”
Investors poured HK$15.7 billion into Lehman Brothers derivatives.

However, Kenny Lee Yiu-sun, chairman of the Hong Kong Stockbrokers Association, said the buyback offer had set a very good example. “Banks should also refund investors in full if they are found to have made similar mistakes.”

Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products, said the number of clients who bought minibonds from Sun Hung Kai Investment Services and the sum they invested were relatively small, so the repurchase deal was not totally suitable for larger banks.

Democratic Party lawmaker Kam Nai-wai said the refund would set a good precedent. “ I can’t see how other banks and institutions … with similar structural deficiencies will be able to evade responsibility.”

Those eligible for the repurchase deal will receive details in the post in the first week of February.

KPMG, provisional liquidators of eight Lehman Brothers firms in Hong Kong, will begin meeting creditors on February 11.

Financials fall after buy-back offer.