China Daily:Authority feels more heat on Lehman Bros

13 June 2009

HONG KONG: The Monetary Authority was held to account again Friday for its failure to avert the Lehman Brothers mini-bond debacle.

Deputy Chief of the Authority Choi Yiu-kwan appeared before the Legislative Council (LegCo) Subcommittee examining allegations of malpractice in the sale of the mini bonds. Choi explained that during on-site investigations, the Monetary Authority inspectors "role play" with sales representatives to assess the understanding of reps about the products they sell.

Choi said representatives with records of high sales, especially sales among individuals more likely to be susceptible to manipulation, are given special scrutiny.

Lawmaker Raymond Ho Chung-tai cited the regulator's figures saying that the authority had carried out about 170 on-site inspections at banks between April 2003 and December last year. He wondered why the probes had failed to avert investors' losses on Lehman Brothers minibonds

Choi responded that during its inspections the Monetary Authority checked the materials banks used for training staff to sell investment products and found the materials satisfactory.

Legislator Kam Nai-wai asked why the authority does not reveal its inspection checklist to banks so that the banks could set guidelines for staying within the rules. Choi replied that banks should already be aware of the rules which are set out in the code of ethics and in the answers to frequently-asked questions issued by the authority.

He said his agency found 72 suspected cases of breaches of rules between April 1, 2003, and September 14 last year through its regular inspections. During the same period it had received 106 complaints from bank clients.

He declined to comment directly on whether existing measures to protect the interests of investors are sufficient. He added that the authority is doing its best.

Choi said the manner in which the authority regulates bank securities sales is similar to the Securities and Futures Commission and to overseas regulators.

He said sales personnel who sold Lehman Brothers-related products passed examinations set down by the Securities Institute concerning relevant regulations. However in matters of product knowledge, sales personnel receive their training from the banks who employ them.

Choi said it had so far received over 21,000 complaints concerning Lehman Brothers-related products and is hurrying to examine them. But he said the authority lacks the staff to proceed more quickly. He noted that the department already has about 60 professionals on loan from accounting firms to help with the investigations. He said he hopes to borrow more staff in the near future.

In the future, Choi said his agency intends to send officers posing as customers to banks so as to evaluate sales practices. He said consultation on the initiative will be launched within a time span of a few months to a year.