By SIOW LI SEN
CIMB-GK and UOB-Kay Hian have broken ranks with the industry by offering to buy back in full the original Minibond investments from vulnerable investors, without deducting interest already earned.
By doing so, the two firms - one, Malaysian-owned, and the other, the broker arm of United Overseas Bank (UOB) - have done what just about every player in the financial services industry typically pays only lip service to and doesn't carry through: differentiating itself from the pack. CIMB-GK is owned by CIMB Group, Malaysia's second largest financial services group.
To recap, 10 distributors here sold failed Lehman Brothers-linked products worth a total of $639 million. They were ABN Amro Bank, DBS Bank, Maybank, Hong Leong Finance, CIMB-GK, DMG & Partners, Kim Eng, OCBC Securities, Phillip Securities and UOB-Kay Kian.
After some prodding from the regulator, DBS Bank, Maybank, Hong Leong Finance and four brokers said they would compensate vulnerable elderly investors (defined as those with not much education and little investment experience) the cost of their investments, minus the interest or coupons already paid. As for other investors, compensation would be decided on a case-by-case basis.
But CIMB-GK and UOB-Kay Hian said that, for vulnerable investors, they would buy back in full the original cost of their investment, irrespective of interest earned.
CIMB-GK chief executive Carol Fong explained the decision as 'appropriate, given the goodwill we have built among our customers'. A UOB-Kay Hian director told BT the company will also buy back the whole thing from the vulnerable group, with no deductions of interest already paid out.
Insiders said there had been quibbling among the distributors over the whole issue of compensation, such as who would qualify as vulnerable and the amount to be refunded.
The banks were said to have resisted going the full hog because they were the biggest parties in the whole affair.
But gouging back the interest paid seems rather petty, especially in view of the total amounts sold, and lost.
It is interesting that it is two brokers which are doing the right thing, rather than the big banks, which normally are seen as taking the lead.
Cynics will, of course, point to the fact that the amounts sold to vulnerable investors by these two brokers were small relative to the others. That could be because sales were done through their remisiers, who typically do have a more informed relationship with clients.
CIMB-GK disclosed that only less than 2 per cent of its total sales of $19 million of the Lehman-linked products or $380,000 were to vulnerable investors. UOB-KayHian said it sold less than $250,000 in value of these products to those considered vulnerable.
By contrast, DBS last month said that, based on the number of cases it reviewed, the bank estimates that total compensation in Singapore and Hong Kong is in the range of $70-80 million. This includes vulnerable customers and cases of mis-selling.
In all, DBS sold a total of $360 million of these failed products to 4,700 customers in Singapore and Hong Kong.
Matthew Wilson, a Morgan Stanley analyst, calculated that in basic financial terms, the amounts sold by DBS are immaterial to the bank's financials. Products sold amount to 13 per cent of its net profit for 2007, he said.
But the potential harm to the reputation of DBS is more serious and harder to calculate. As for Maybank and Hong Leong Finance - which are popular with locals here given that much of their branch networks are in the heartland areas - they too will have to work hard to rebuild trust.
On the other hand, CIMB-GK's gesture is not likely to be forgotten when its sister unit CIMB Islamic Bank launches Islamic banking in Singapore - targeting both the retail and business markets - over the next 12 months.
When the chips were down, and even though it may have been a small thing, CIMB-GK did it right. Ditto for UOB KayHian.
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