SCMP:New bank rules should better protect customers

Asymmetric information is not an elegant phrase, but it is a useful economic concept by which to analyse situations that involve conflicts of interest - and whether, and how, they need to be regulated. A salesman who tries to promote a product is asymmetrically disadvantaged because he does not know - and can only guess - the size of your wallet. It is not so with banks, which have privileged access to clients' financial information and have often exploited it to sell risky financial products. The Lehman Brothers minibond fiasco has exposed that danger and become a catalyst for regulatory change. Hopefully, better supervision of banking activities, which will come into force this year, will bring more protection for clients and their financial information.

The banks have fought hard to resist changes, arguing at one point that knowledge of clients' finances enables banks to tailor services to their needs. Leaving aside this obviously self-serving argument, regulators around the world have been having the upper hand as a result of the global financial turmoil - and Hong Kong is no different. Instances of apparent mis-selling of Lehman minibonds have helped generate intense pressure on banks to adopt new regulations.

The new rules require banks to separate traditional banking services, such as deposit-taking and making loans, from retail securities and investment services. One of the most irritating and unfair bank practices in recent years has been allowing counter tellers to look at clients' bank books during ordinary transactions and then promote dodgy investment or insurance products. Under the new rules, they can no longer do so. Furthermore, one bank department cannot share clients' information with another to promote sales without their express consent. Recordings of investment transactions will be made and retained for at least seven years. In cases involving the sale of risky products, a third staff member needs to review the transaction. It is not clear what amounts to high-risk investments these days when the share prices of some US banking and insurance giants are behaving like penny stocks. Even the shares of locally beloved HSBC have plunged to lows most investors found scarcely imaginable.

The new rules will not ban all instances of cross-selling. That would not be desirable, because banks offer mostly legitimate investment products. But they should offer better protection to customers.