September 29,2008

Lehman Brothers' Minibonds Teach Hong Kong Investors a Big Lesson

By Leanne Wang
The earthquake on the Wall Street, triggered by the bankruptcy of Lehman Brothers, has been shaking the financial sector in Hong Kong in the last two weeks. Thousands of retail investors holding minibonds of Lehman Brothers, at the edge of losing their lifelong savings, have filed complaints to the regulators and even staged protests, in a bid to urge the government to take action upon some intermediaries‚Ä?mis-selling, and to hold regulators accountable for failing in supervision and investor education and protection.¬†
 
¬†"I am illiterate. I have deposited my savings in the bank year after year. When the salesman (at the bank) recommended me the minibonds as the most suitable financial product for retirement, promising higher interest rate and low risk, I invested HK$500,000, all the money I have saved from decades of manual work‚Ä?, said an old man in trembling voice on a meeting organized by the Consumer Council of Hong Kong.
 
Together with the old man, hundreds of ordinary citizens, mostly elderly, seeing their lifesavings evaporate along with the collapsed US investment bank, were accusing the banks‚Ä?mis-selling, and the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA)‚Äôs ineptitude.
 
The investors‚Ä?loss is deep. Since the launch in Hong Kong in 2003, Lehman's minibonds had attracted a wide range of retail investors to throw in large chunk of personal savings because the products were marketed as "low-risk" and of "low investment threshold". According to the statistics of SFC, there is approximately HK$12.7 billion minibonds has been issued by Lehman Brothers, sold by 20 licensed commercial banks in Hong Kong.
 
How did the retail investors, many of them having virtually no knowledge or experience with capital markets, end up buying a massive amount of the risky and complex structured products?
 
The banks have been mis-selling over the past few years. The investors disclosed that the intermediaries had not mentioned that the products were related to Lehman Brothers and potential risks, or explained or showed the prospectus of the products; some even had not sent a copy of signed agreement to the investors.
 
One investor surnamed Chan said she thought purchasing financial products through banks would be safer than from brokerages. Actually, nowadays, while financial intuitions transform to ‚Äėfinancial supermarkets‚Ä?in the highly competitive market, the boundary between commercial banks and brokerages has been increasingly blurred. Sadly though, this time, banks in Hong Kong have misused the trust of their customers and are now under credibility crisis. "Shame on this international financial centre", said Mrs Chan.
 
Moreover, why banks kept selling the minibonds as low-risk products in early September when Lehman Brothers were already in deep trouble? It seems that both SFC, the watchdog of Hong Kong's security market and HKMA, the de facto central bank of the city, have failed in supervising the market and operations of commercial banks.
 
On the retail investors front, there is lack of understanding of the capital market, awareness of risks associated with the financial products they have invested in, and the role of the SFC and HKMA in markets. Some investors naively believe that products approved by SFC are safe for investment and now is the time for the regulators to take care of them, a dangerous misunderstanding which could potentially lead to a social turmoil especially under the volatile market conditions.
 
On September 28, a spokesman for the Financial Services and Treasury Bureau (FSTB) announced that HKMA has required a number of banks to open public telephone enquiry lines for answering questions on Lehman-Brothers-related investment products and has asked banks to write to affected customers to explain clearly the latest situation regarding these products and to arrange briefings for them.
 
FSTB also announced that, in about three months, the HKMA and SFC would submit reports about lessons learned and issues identified this time to the Financial Secretary who will consider, on a policy level, what can be done to further improve Hong Kong's regulatory framework and enhance investor protection and education.
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