SCMP:SFC seeks to regulate minibonds

31 Oct 2009

A major regulatory loophole exposed by the Lehman Brothers minibond fiasco is to be plugged under a Securities and Futures Commission proposal that will require all structured products sold to the public to be regulated by it.

Although the SFC is responsible for authorising all mutual fund products, it does not cover structured products such as the minibonds issued or guaranteed by Lehman.

After Lehman's collapse last year, these products became worthless, sparking more than 21,000 investor complaints to the SFC and the Hong Kong Monetary Authority.

Minibonds are not corporate bonds, but risky credit-linked notes that were not subject to SFC regulation because under the law, structured products such as minibonds are classed as debentures and fall under the Companies Ordinance.

The SFC yesterday proposed to plug the loophole by changing the law to transfer the regulation of public offerings of structured products in the form of debentures from the Companies Ordinance to the Securities and Futures Ordinance.

So, unless an exemption applies, unlisted structured products, their offering documents and marketing materials will have to be authorised under the SFO before being offered to the public.

"This will allow the SFC greater flexibility to regulate public offers of unlisted structured products by setting out appropriate standards in the new code on unlisted structured products," the SFC said.

The consultation will last two months.

Legislator Chim Pui-chung, who represents the financial services sector, said it was a move in the right direction. "After this proposed law change, the SFC will have the power to regulate these products. This is a good first step but it cannot solve all the problems," he said.

"The SFC will also need to set tough disclosure standards to require investment banks issuing structured products to disclose all the risks to investors.

"All salespeople must also behave themselves by not mis-selling the products. Otherwise, it still may not prevent a repetition of the minibond fiasco."