SCMP:Minibond settlement may start new troubles

Source

3 Feb 2009
Enoch Yiu

The city’s corporate police seem to be getting smarter and faster – at least when it comes to such high-profile cases as the minibond issue.

While in the past insider dealing cases needed seven or eight years to reach a final verdict, the Securities and Futures Commission has made history by taking only four months to reach settlement with Sun Hung Kai Investment Services on the minibond refund.

The brokerage has agreed to voluntarily pay back all HK$85 million to 310 investors in minibonds issued or guaranteed by collapsed Lehman Brothers Holdings. The landmark settlement shows the commission can move mountains when it wants to.

It also appears to be a smart choice. While the broker insisted it had done nothing wrong, it agreed to give a full refund to investors. Had the SFC opted to take the case to the Market Misconduct Tribunal, it might have waited many years for a ruling and investors might not have got their money back in the end.

Our regulatory friends have assured White Collar that Sun Hung Kai is not the only one in the SFC’s sights. It is checking other minibond distributors – understood to include two brokers and 21banks – and will demand a full refund to clients if it is confirmed they had misled investors into buying the products without explaining the risks.

Once the SFC reached an agreement with an institution, all of the firm’s clients would receive the compensation.

White Collar is concerned investors may now ignore the moral hazard of investing in such dubious products. The 310 Sun Hung Kai investors who bought the Lehman minibonds did not need to bear any investment losses at all.

The SFC considered they should be fully repaid as they would never have been lured into buying the products if brokers and banks had clearly explained the risks involved.

But Sun Hung Kai has been a broker in Hong Kong for 40 years and has many sophisticated clients. Were all these clients so naive as to be misled by the brokerage staff? If some investors bought the products with their eyes open, they should bear at least some responsibility.

Has a precedent been set where investors use high-profile complaints and street protests to pressure the SFC to force intermediaries to accept liability for the investors’ own wrong investment decisions?

The other problem created by the Sun Hung Kai settlement is the expectation gap. Other minibond investors may not accept lower compensation levels from their banks or brokerages. It will certainly add pressure to other banks and brokers to follow suit, but neither the SFC nor the Hong Kong Monetary Authority can force them to offer the same settlement.

It is easy to understand why Sun Hung Kai was willing to pay up – the money involved was not large, at less than 1per cent of all minibonds sold. Also, if it said no to the SFC, it would have risked losing its licence.

For the banks, some of which have sold several billion dollars worth of minibonds, a full settlement may be less attractive. Although the SFC can mete out disciplinary action, it is the HKMA that supervises their daily operations and issues their licences.

As this column has mentioned before, the government should seriously consider a single financial regulator for banks and brokers.