24 Jan 2009
It may be premature for most people who face losses on investments in Lehman Brothers minibonds to celebrate a victory for the small handful who have got all their money back. But any breakthrough in the saga over alleged mis-selling of the products as low-risk is welcome news for them. Aggrieved investors could not ask for more than full compensation. The HK$85 million voluntary settlement agreed by Sun Hung Kai
Investment Services for some 300 investors puts pressure on the 21 banks and two other brokerages involved in the sale of the minibonds in Hong Kong. The outcome in this case appears to vindicate the Securities and Futures Commission’s top-down approach of investigating the way institutions sold the minibonds, rather than a protracted case-by-case examination of complaints. Any adverse conclusions about an institution’s conduct can then cover all its affected clients.
Sources said the investment company apparently came forward with the settlement offer, although it has denied any liability or wrongdoing. The company obviously believes it is better to put the matter behind it quickly by settling with its clients than face the prospect of drawn out legal proceedings and the possible loss of its trading licence. In any case, its decision is commendable, as it saves its clients from further anguish and, above all, financial losses. But the real significance of the settlement is to be found in the reasons for a reprimand issued by the SFC over concerns about the way the broker sold the minibonds.
Despite their name, they were not corporate bonds but complex credit-linked instruments. The SFC was concerned about the adequacy of the company’s due diligence, training of sales staff, risk assessment, and record-keeping in relation to the minibonds. The company agreed the concerns were serious.
One question now is whether such shortcomings were prevalent at other institutions that sold the minibonds, mostly banks. It seems unlikely that the SFC’s investigations will find that this is an isolated case.
Another question is whether institutions whose clients make up a higher proportion of the 47,000 investors in HK$15.7 billion of minibonds will be as willing to settle their losses in full.
The SFC does not have the power to impose a settlement. But by publishing the results of its investigations, it does have the power to exercise some moral persuasion. If other institutions find that the concerns in this case have some application to them, they may conclude that the example of Sun Hung Kai is a better way to conclude the affair than dragging it out. It is significant that in announcing the settlement, the SFC dodged the issue of whether claims of mis-selling of the minibonds as low-risk investment products have been substantiated, and Sun Hung Kai admitted no liability or wrongdoing. The terms of the settlement sets a rather appealing precedent for other institutions that are eager to put the matter behind them quickly. Every situation is different, however, so the terms of any settlement could depend on the extent and seriousness of any misconduct. Whatever the terms for each case may be, it is important, and only fair, that even where banks reach settlements with their clients, the SFC will still insist on disclosure of any concerns arising from its investigations.
The financial secretary has called for a review of regulations after receiving reports on the minibond affair from the SFC and the Hong Kong Monetary Authority, which regulates banks. For the sake of confidence in our financial system, the government must move swiftly to enhance investor protection without stifling a free market.
Friday, January 23, 2009
SCMP:Minibond deal raises pressure for more refunds
24 Jan 2009
Joyce Man Additional reporting by Maria Chan, Enoch Yiu and Albert Wong. Source.
More institutions and banks were likely to consider compensating minibond investors after Sun Hung Kai Financial announced it would offer full refunds, a knowledgeable source said yesterday. But the source said they would each propose a deal on their own terms.
“ I think they will see what has happened with Sun Hung Kai and realise it’s a quick, better way to put this behind them,” said the source, who did not want to be named.
Sun Hung Kai Financial, parent company of Sun Hung Kai Investment Services – which sold minibonds linked to Lehman Brothers, the US investment bank that collapsed in September – announced on Thursday it would buy back minibonds from 310 customers for about HK$85 million.
At the same time, the Securities and Futures Commission raised concerns about Sun Hung Kai Investment Services’ due diligence, salesstaff training, risk assessment and record-keeping on minibonds. Minibonds are not corporate bonds but consist of high-risk credit-linked derivatives, marketed as a proxy investment in well-known firms.
Asked whether other banks might respond with compensation of 70, 80 or 90 per cent of original investments, the source said that would “depend on how serious [the commission’s] concerns are about the conduct”.
But the commission had no authority to force this on them, the source said. A spokeswoman for the Monetary Authority, which regulates banks, also said it could not do so.
The source said the deal on Thursday proved the efficacy of a top-down approach, under which the commission investigated whole institutions, not individual complaints.
Secretary for Financial Services and the Treasury Chan Ka-keung said Sung Hung Kai Financial’s repurchase offer proved the commission’s investigation was effective in protecting investors’ interests. He would not say if he thought other banks would be pressured into following suit, only that he believed the commission and the Monetary Authority would be fair in their investigations.
A banker who asked not to be named said the settlement would put pressure on banks as investors would have high expectations. However, the banker said the top-down approach the SFC used had its drawback as banks would have to compensate all customers if the SFC found they had systematic problems in selling investment products.
“It’s unfair if we have to pay for all customers unless the systematic problem is very big,” the banker said, adding that it was hard to judge how big the problem would need to be to warrant compensating all customers.
Another banker expected there would be more pressure for banks to reach a similar agreement with the SFC. But he believed few would strike deals.
“It is not because the amounts of minibonds sold by banks are bigger; the major reason is that it’s unreasonable. We only compensate customers if we are wrong.”
Investors poured HK$15.7 billion into Lehman Brothers derivatives.
However, Kenny Lee Yiu-sun, chairman of the Hong Kong Stockbrokers Association, said the buyback offer had set a very good example. “Banks should also refund investors in full if they are found to have made similar mistakes.”
Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products, said the number of clients who bought minibonds from Sun Hung Kai Investment Services and the sum they invested were relatively small, so the repurchase deal was not totally suitable for larger banks.
Democratic Party lawmaker Kam Nai-wai said the refund would set a good precedent. “ I can’t see how other banks and institutions … with similar structural deficiencies will be able to evade responsibility.”
Those eligible for the repurchase deal will receive details in the post in the first week of February.
KPMG, provisional liquidators of eight Lehman Brothers firms in Hong Kong, will begin meeting creditors on February 11.
Financials fall after buy-back offer.
Joyce Man Additional reporting by Maria Chan, Enoch Yiu and Albert Wong. Source.
More institutions and banks were likely to consider compensating minibond investors after Sun Hung Kai Financial announced it would offer full refunds, a knowledgeable source said yesterday. But the source said they would each propose a deal on their own terms.
“ I think they will see what has happened with Sun Hung Kai and realise it’s a quick, better way to put this behind them,” said the source, who did not want to be named.
Sun Hung Kai Financial, parent company of Sun Hung Kai Investment Services – which sold minibonds linked to Lehman Brothers, the US investment bank that collapsed in September – announced on Thursday it would buy back minibonds from 310 customers for about HK$85 million.
At the same time, the Securities and Futures Commission raised concerns about Sun Hung Kai Investment Services’ due diligence, salesstaff training, risk assessment and record-keeping on minibonds. Minibonds are not corporate bonds but consist of high-risk credit-linked derivatives, marketed as a proxy investment in well-known firms.
Asked whether other banks might respond with compensation of 70, 80 or 90 per cent of original investments, the source said that would “depend on how serious [the commission’s] concerns are about the conduct”.
But the commission had no authority to force this on them, the source said. A spokeswoman for the Monetary Authority, which regulates banks, also said it could not do so.
The source said the deal on Thursday proved the efficacy of a top-down approach, under which the commission investigated whole institutions, not individual complaints.
Secretary for Financial Services and the Treasury Chan Ka-keung said Sung Hung Kai Financial’s repurchase offer proved the commission’s investigation was effective in protecting investors’ interests. He would not say if he thought other banks would be pressured into following suit, only that he believed the commission and the Monetary Authority would be fair in their investigations.
A banker who asked not to be named said the settlement would put pressure on banks as investors would have high expectations. However, the banker said the top-down approach the SFC used had its drawback as banks would have to compensate all customers if the SFC found they had systematic problems in selling investment products.
“It’s unfair if we have to pay for all customers unless the systematic problem is very big,” the banker said, adding that it was hard to judge how big the problem would need to be to warrant compensating all customers.
Another banker expected there would be more pressure for banks to reach a similar agreement with the SFC. But he believed few would strike deals.
“It is not because the amounts of minibonds sold by banks are bigger; the major reason is that it’s unreasonable. We only compensate customers if we are wrong.”
Investors poured HK$15.7 billion into Lehman Brothers derivatives.
However, Kenny Lee Yiu-sun, chairman of the Hong Kong Stockbrokers Association, said the buyback offer had set a very good example. “Banks should also refund investors in full if they are found to have made similar mistakes.”
Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products, said the number of clients who bought minibonds from Sun Hung Kai Investment Services and the sum they invested were relatively small, so the repurchase deal was not totally suitable for larger banks.
Democratic Party lawmaker Kam Nai-wai said the refund would set a good precedent. “ I can’t see how other banks and institutions … with similar structural deficiencies will be able to evade responsibility.”
Those eligible for the repurchase deal will receive details in the post in the first week of February.
KPMG, provisional liquidators of eight Lehman Brothers firms in Hong Kong, will begin meeting creditors on February 11.
Financials fall after buy-back offer.
HK brokerage agrees to refund minibond buyers
By Tom Mitchell in Hong Kong
Published: January 23 2009 04:22 | Last updated: January 23 2009 04:22
A Hong Kong brokerage has agreed to refund retail investors in full for their losses on so-called “Lehman Brothers Minibonds”, in a settlement that will set a worrying precedent for other financial institutions in the territory that have sold about $2bn worth of the controversial investment products.
In a deal reached with Hong Kong’s market regulator, the Securities and Futures Commission, Sun Hung Kai Investment Services agreed to refund $11m to more than 300 buyers of the minibonds, which are in fact complex derivative instruments linked to the now defunct US investment bank.
The agreement goes beyond calls by the Hong Kong government last year for banks to repurchase the instruments at their “market value”. Instead, Sun Hung Kai will repay investors their entire principal. Twenty-four banks and brokerages, led by Bank of China’s Hong Kong branch, sold Lehman Brothers minibonds with an estimated face value of $2bn to more than 40,000 investors.
“We are very pleased with the outcome that has been achieved and we believe the approach adopted has produced a result which is in the best interests of the investors,” Martin Wheatley, SFC chief executive, said in a statement.
The controversy surrounding the mini-bonds has sparked a political firestorm in Hong Kong, with burned investors descending regularly on bank offices, SFC headquarters and the territory’s legislature. Many have lost their life savings and claim that the risky minibonds were mis-sold by bank and brokerage staff.
While Sun Hung Kai did not admit to any wrongdoing in its settlement with the SFC, the brokerage acknowledged concerns raised by the regulator including inadequate due diligence, training of sales staff and record keeping.
“We achieved an outcome which we believe represents the best possible solution for our minibond customers,” Lee Seng-huang, Sun Hung Kai executive chairman, said. “We understand it has not been an easy time for all concerned, but we believe that this voluntary initiative will bring closure to our affected customers, particularly in light of this challenging economic environment.”
The Hong Kong Monetary Authority, the territory’s bank regulator, has received about 20,000 complaints related to the sale of minibonds. As of January 15 the authority had formally opened more than 4,500 investigations and referred 251 cases to the SFC for possible enforcement action.
Hong Kong’s politicians have also leapt into the fray, working with the protesters and forming a special legislative subcommittee to look into the controversy.
Published: January 23 2009 04:22 | Last updated: January 23 2009 04:22
A Hong Kong brokerage has agreed to refund retail investors in full for their losses on so-called “Lehman Brothers Minibonds”, in a settlement that will set a worrying precedent for other financial institutions in the territory that have sold about $2bn worth of the controversial investment products.
In a deal reached with Hong Kong’s market regulator, the Securities and Futures Commission, Sun Hung Kai Investment Services agreed to refund $11m to more than 300 buyers of the minibonds, which are in fact complex derivative instruments linked to the now defunct US investment bank.
The agreement goes beyond calls by the Hong Kong government last year for banks to repurchase the instruments at their “market value”. Instead, Sun Hung Kai will repay investors their entire principal. Twenty-four banks and brokerages, led by Bank of China’s Hong Kong branch, sold Lehman Brothers minibonds with an estimated face value of $2bn to more than 40,000 investors.
“We are very pleased with the outcome that has been achieved and we believe the approach adopted has produced a result which is in the best interests of the investors,” Martin Wheatley, SFC chief executive, said in a statement.
The controversy surrounding the mini-bonds has sparked a political firestorm in Hong Kong, with burned investors descending regularly on bank offices, SFC headquarters and the territory’s legislature. Many have lost their life savings and claim that the risky minibonds were mis-sold by bank and brokerage staff.
While Sun Hung Kai did not admit to any wrongdoing in its settlement with the SFC, the brokerage acknowledged concerns raised by the regulator including inadequate due diligence, training of sales staff and record keeping.
“We achieved an outcome which we believe represents the best possible solution for our minibond customers,” Lee Seng-huang, Sun Hung Kai executive chairman, said. “We understand it has not been an easy time for all concerned, but we believe that this voluntary initiative will bring closure to our affected customers, particularly in light of this challenging economic environment.”
The Hong Kong Monetary Authority, the territory’s bank regulator, has received about 20,000 complaints related to the sale of minibonds. As of January 15 the authority had formally opened more than 4,500 investigations and referred 251 cases to the SFC for possible enforcement action.
Hong Kong’s politicians have also leapt into the fray, working with the protesters and forming a special legislative subcommittee to look into the controversy.
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