The Standard:Nightmare nears end

23 July 2009

Banks have agreed to splash out more than HK$6 billion to buy back all outstanding Lehman Brothers minibonds.

By doing so, they seek an end to a saga that has run for more than 10 months, sparking deep anger and distress among investors.

The 16 banks that sold the complex products will offer about 29,000 Hong Kong investors - more than 90 percent of those in the SAR who bought the high- risk derivatives linked to the collapsed US bank - an average 70 percent of their investments.

That means banks need to pay out around HK$6.3 billion to repurchase the minibonds.

The scandal, which began last September, has fueled street protests and had senior financial officials testifying before the Legislative Council.

The deal announced yesterday was thrashed out with the banks by the Securities and Futures Commission and the Hong Kong Monetary Authority. It will "provide substantial benefits for the vast majority of customers holding minibonds that would not otherwise be received by them,'' said Martin Wheatley, chief executive of the Securities and Futures Commission, who described the deal as a "good compromise.'' Secretary for Financial Services and the Treasury Ceajer Chan Ka-keung agreed. "Those accepting the offers will be relieved of the delay and uncertainty in going through the liquidation process,'' Chan said.

A bank must pay a price equal to 60 percent of the principal of the original investment for investors below the age of 65, and 70 percent for those aged 65 or more as at July 1. They can retain any coupon payments already received.

Once the underlying collateral is recovered by the banks, each of them will make a further payment of initially up to 10 percent of the principal of the minibonds to customers below the age of 65.

And if recoveries exceed 70 percent, the banks will pay the entire excess amount to those who have accepted the offer, which could take some investors' settlements to 100 percent.

For example, assuming an investment of HK$100 and the product's collateral is worth HK$40, an investor will first receive HK$60 and then another HK$10 for the collateral recovered, taking the total settlement to HK$70.

If the collateral is worth HK$80, the investor will get HK$80. If the collateral is worth HK$100, the investor will be refunded in full.

Banks will make available a total of HK$200 million to the trustee of the minibonds to assist in the recovery of the underlying collateral for each outstanding series of the product. Those who have already reached a settlement with the banks will not qualify for the buyback. However, the banks will make ex-gratia payments to those whose settlements were less than they would receive under the deal announced yesterday. Banks need to inform customers about the offer ``in an expeditious manner'' and put money in their accounts within 30 days of the offer being accepted, according to the HKMA.

Professional investors, including non-individual and experienced investors, are not qualified under the repurchase offer, Wheatley said.

The regulators will call off investigations into the sale and distribution of minibonds by the banks in respect of investors accepting the offer. But authorities will continue investigations if there are claims of deception or other crimes. ``We intend to allocate resources to handle non-Lehman complaints,'' said Choi Yiu-kwan, HKMA deputy chief executive.

Each of the banks will also engage an independent reviewer to examine systems and processes relating to the sale of structured products and then report to authorities. The banks must also commit to the implementation of all recommendations by the reviewer.

A qualified third party also has to be engaged to review and enhance complaint-handling procedures.

``The distributing banks should draw lessons from this incident and properly implement the agreement reached with the regulatory authorities'' on selling structured investment products, Ceajer Chan said.

Speaking on behalf of the banks, David Li Kwok-po, chairman of the Bank of East Asia (0023), said the agreement demonstrates their ``unwavering commitment'' to Hong Kong and the welfare of customers.

Ahead of the repurchase agreement by banks, only brokerages Sun Hung Kai Investment Services and KGI Asia had fully refunded their clients. That occurred earlier this year. As of July 16, the HKMA had received 21,490 complaints concerning Lehman-related products, including minibonds.