Tuesday, November 04, 2008

SCMP: Regulators have let down investors badly


4 Nov 2008
Frank Ching is a Hong Kong-based writer and commentator. frank.ching@scmp.com
Chief Executive Donald Tsang Yamkuen talked in his policy address of Hong Kong’s position as an international financial centre and spoke of “ optimising the supervisory framework” as though it were already very good. Alas, one can tell from the protests outside banks in recent weeks by investors complaining about being lured into unsound investments that the supervisory framework is far from satisfactory. In this connection, Premier Wen Jiabao
was much closer to the mark when he called on the Hong Kong government to “seriously learn the lessons” from the financial crisis and “analyse the problems with the structure of Hong Kong’s economy and regulation of its financial system”.

More than 43,000 people have lost money from investing in Lehman minibonds. Mr Tsang said that the Monetary Authority and the Securities and Futures Commission “will examine how to further strengthen the regulatory regime and enhance investor protection”. That is shutting the stable door after the horse has bolted. If banks had been under much tighter supervision, these tragedies could have been avoided.

The SFC, like its counterparts elsewhere, has a code of conduct for banks and other licensed or registered institutions. Its first general principle states that institutions should “act honestly, fairly, and in the best interests of its clients”. Can Hong Kong’s banks say, hand on heart, that they have acted in the best interests of their customers when persuading them to buy a risky product that investors did not understand?

One of the commonest complaints is that investors did not know what they were getting into because banks did not make adequate disclosure. This is in direct violation of General Principle Five, which says an institution “should make adequate disclosure of relevant material information in its dealings with its clients”.

Paragraph 5.3 is specifically about derivative products. This says that whoever provides “services to a client in derivative products” should make sure that “the client understands the nature and risks of the products and has sufficient net worth to be able to assume the risks and bear the potential losses of trading in the products”. Would Hong Kong be in this mess if the banks had abided by this provision?

General Principle Six warns against conflicts of interest. But in a system where banks pay their relationship officers bonuses for making a sale, these employees have a clear conflict between their own interests and those of their clients. What should be done?

According to General Principle Nine, “the senior management” should “bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures”.

The minibonds issue shows that banks sell risky products to retail customers not meant for them. Under the code, sophisticated financial instruments should only be sold to “professional investors”, a term that is carefully defined. This is a problem the SFC doesn’t seem to be sufficiently aware of. Its chief executive, Martin Wheatley, has been quoted as saying that investors should have ensured they knew what they were buying. If the responsibility is on the investor, what is the point of having a regulatory body?

Under the SFC’s code, a bank needs first to satisfy itself as to whether a client’s financial situation, investment experience and investment objectives make it appropriate to recommend a particular product. Such requirements are waived in the case of a “professional investor”.
Mr Wheatley seems to assume that all bank clients are professional investors. That is not the case. It is why the SFC’s code says banks cannot treat anyone as a professional investor unless he or she agrees in writing to be treated that way, and the client can withdraw from that status at any time. It seems that no one is regulating our regulators.


Anonymous said...

I know this article is about HK. But strangely I seem to be reading an article concerning SG. An odd sense of dejavu!

Anonymous said...

I am glad theres so much Talk

Surely the Cows are coming home


Anonymous said...

This writer is what I would call a Journalist. The writers at our ST are mere reporters. I wonder why they can't write something like this article. I thought we have the best newspaper in Asia!

Nicholas Loh

Anonymous said...

There are not enough professional investors to go around. Also these investors are also smart. So of course must go for any investor and go for volume lah!! If not, how else to make money?

But in the process, they also kill the market and the investors so no more such income, no more fat bonus and even need cut staff lah. At least can clean up their act.

Unknown said...

Was last week's Hong Lim Park gathering televised at all over TV? No and why?? Because some groups up there do not want further negative publicity that will lower the share price and cause headaches to authorities!

Anonymous said...

MAS has also let down the consumers too. What is use of having the power to enforce the laws on the FIs and the RMs when they have not been used since 2001. You must as well don't have them. It is sham, isn't it?
They only create suspicion and cause disquiet that there might be conflict of interest...It is disgusting to know that the FIs, the RMs , the insurers ,the insurance agents are freely committing malpractices like mis=-selling and misrepresentation every day under their nose and at the expense of the consumers and nothing is done by the regulator.
MAS is a great disappointment.


Anonymous said...

HK asking for independent commission of inquiry, instead of HKMA and especially the SFC investigating.

Because the chief executive of SFC already saying customers at fault without any investigation; may be he has undisclosed interests in investment banks ? That is why HK legislators insist for independent commission of inquiry.

Anonymous said...

MAS sucks....mis-selling and misrepresentation have going on for donkey years. From the banks to the insurance agents. It is a lie to say MAS didn't know anything. MAS will slowly act if there are complaints. But how many of the investors know how to complain. Without Mr. Tan's leadership maybe this fiasco would have been hushed up and swept under the carpet.Other than this I wonder MAS knows that there are many thousands and thousands of
insurance policyholders who like to complain against their insurance agents but didn't know how. Against insurance agents for mis-selling and misrepresentation, for unethical selling, for cheating, for packaging toxic products for them. If MAS is really serious about disciplining the market it has to do something about enforcement.
Set up a review centre for investors and policyholders to consult qualified financial planners for second opinion and also to check for mis-selling.
Especially for insurance policyholders it is important that they know what they bought immediately or sooner and not many years down the road when cancellation or surrender is difficult and put them in a dilemma. Earlier action against the insurance agents is cheaper.
I hope a body is set up to run this service by financial planners..Cases from here can be referred to FIDREC or CASE for legal suit.
This will sure eradicate the industry of dishonest and incompetent insurance agents.. This is nipping in the bud.


Anonymous said...

In this age of modern selling and modern politics, Independent is the new word for Appearingly Not Dependent.

Enough Said.

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