SCMP: Banks risked reputations, watchdog says

South China Morning Post (Hong Kong) - October 12, 2008
Author: Loretta Fong, Celine Sun and Eva Wu

The controversy over the sale of minibonds to small investors held a lesson for banks, the Hong Kong Monetary Authority's executive director said yesterday.

"A bank's reputation can easily be jeopardised when it sells high-risk derivative products to small investors. I think we need to review this practice in future," said Raymond Li Ling-cheung.

The authority has received 8,300 complaints from investors in minibonds issued or guaranteed by bankrupt US bank Lehman Brothers.

Hongkongers bought HK$15.7 billion of minibonds and related complex derivatives from banks and brokerages and stand to lose much or all their money. Many claim banks mis-sold the products as low-risk.

Of the complaints it has received, the authority has so far assessed 600 and found 71 require investigation.

Banks or their staff found to have misled customers may be fined or censured or may have their business licences suspended.

Minibond buyers seeking to recover their investments held fresh talks yesterday with some of the banks that sold them. HKMA deputy chief executive Choi Yiu-kwan said the government's proposal that banks buy back minibonds at current value was the best way for them to recover some of their losses.

The authority is preparing a report for the government on the sale of minibonds.

Meanwhile, Hong Kong Exchanges and Clearing chairman Ronald Arculli admitted its board of directors did not study an internal report drafted five years ago that warned of a lack of oversight of the sale of complex derivatives such as minibonds.

"Colleagues passed the report to the management. But it was found that the worries exposed by the report would not affect much the operations of HKEx. Thus there was no follow-up afterwards," he said.