SCMP:At least 11 banks mis-sold minibonds, SFC chief says

24 June 2009

Preliminary findings indicate that at least 11 banks violated regulations when selling Lehman Brothers minibonds, legislators heard yesterday.

Securities and Futures Commission chief executive Martin Wheatley told a Legislative Council subcommittee meeting that was the result of investigations of all 19 banks that sold the complex investment products.

"In seven of those, we have reached our preliminary conclusions where we have either filed preliminary notice of disciplinary action or we have opened settlement investigations," Mr Wheatley said, adding that there was prima facie evidence of lapses in control.

The securities regulator was also concluding initial investigations with four other banks, which would either receive a preliminary notice or face settlement talks, he said.

Mr Wheatley refused to comment on market rumours that the regulator had rejected Bank of China (Hong Kong)'s offer to buy back minibonds from clients at 60 per cent or more of the investment principal.

Earlier, brokers Sun Hung Kai Investment Services and KGI Asia reached an agreement with the commission to buy back minibonds from their clients at their original value.

"In terms of the statement about whether the initial agreements the SFC reached with the brokers is the only model, the answer is no, we are not dogmatic," Mr Wheatley said. "We have said that we will take account of the extent to which any bank mitigates the losses in the enforcement action that we take."

The regulator has received 8,400 complaints since September, most of them alleging that Lehman Brothers minibonds were misleadingly sold.

At the three-hour hearing, Mr Wheatley was repeatedly asked if there was any problem with the demarcation between the commission and the Monetary Authority.

"I think the demarcation is clear," he said.

Saying that the commission had no legal role overseeing the authority in the regulation of banks, Mr Wheatley said the commission was in "a co-ordination role, not a supervisory or an oversight role" with the banking regulator.

Asked whether the commission would regulate the names of financial products, Mr Wheatley said it would ask the issuer to justify the name.

It had also proposed to the financial secretary that more guidelines and codes be developed to cover the marketing of related documents.

Minibonds were not corporate bonds, but high-risk, credit-linked derivatives marketed as a proxy investment in well-known companies.

Mr Wheatley will give evidence again on Friday.