TODAY:We should follow HK's example ; Protect individuals, not just the banks

27 July 2009

WHILE the Lehman Minibonds affair is far from over, a final solution to the problem of the ill-fated notes linked to the now-failed American investment bank appears to be nearer in Hong Kong than in Singapore.

Last week, Hong Kong’s Securities and Futures Commission (SFC) announced BOC Hong Kong Holdings and 15 other financial institutions in the Special Administration Region had agreed to pay at least US$0.60 ($0.86) on the dollar to the nearly 30,000 people who invested in the notes.

The total compensation in Hong Kong, where some US$1.8 billion worth of the notes were sold, will amount to about HK$6.3 billion ($1.17 billion). The final compensation will however depend on the amount of collateral the banks can recover from Lehman’s liquidators. And according to Hong Kong’s Financial Secretary John Tsang, investors could get back 70 per cent or more of their original investments.

By comparison, compensation to the nearly 10,000 people here who invested some $520 million in structured notes like the Lehman Minibonds, DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes amounted to far less — just over $105 million. In fact, the compensation ranged from a mere 1 per cent of the amount sold as in the case of stockbrokers UOB Kay Hian to the 67 per cent, or some $58 million paid out by Hong Leong Finance to those who complained that they had been misled into buying the notes.

Despite acknowledgment by the Monetary Authority of Singapore (MAS) that there had been at least some mis-selling by the institutions concerned, those investors who have not been offered any compensation have been told to either continue with the three-step dispute resolution process recommended by the MAS, or take legal action on their own, a step a number have since taken. Its findings on the matter were disappointing for many, to say the least.

Worse still, the MAS has also come out to say that the findings of its recent report on the matter, under which some 10 financial institutions were punished, did not automatically mean the institutions are legally liable despite the tacit acknowledgment of mis-selling. The 10 institutions concerned, which included Singapore’s largest bank, DBS Bank, and Hong Leong Finance, have been barred from selling complex financial instruments for periods of up to two years.

It appears the authorities here were more concerned about protecting the system rather than the individual.

The 10 institutions were found guilty of at least one of three failings — misclassifying the rather complex notes they were selling as lower-risk products than they really were; not providing accurate and complete information about the structured notes to sales staff; and not ensuring that the sales teams were adequately trained to sell the notes.

Many felt the punishment meted out was merely a slap on the wrist.

While some investors, especially the elderly and the more ignorant, were able to secure full compensation, the authorities here appear to have relied more on moral suasion rather than have exerted any real pressure on a settlement.

So, why wasn’t the Hong Kong model followed? After all, it isn’t as if the institutions here do not have the capacity to have been more generous with their payouts.

For sure, not all the investors were as ignorant as they made out to be. Many were led by greed to buy the notes by the relatively-high returns they promised. Others did not even bother to assess the risks involved in buying these instruments.

But the authorities must also accept some blame in not adequately monitoring the institutions and the people who sold these highly complex and risky products, which even many bankers did not fully understand.

It is ironic that Hong Kong, one of the greatest bastions of free-wheeling and dealing, was able to wrest a better deal for the victims of the Lehman Minibonds than Singapore, which has a reputation for having a better regulated financial environment.