The HKMA is dealing with the complaints as quickly and objectively as possible.
With regard to the problems faced by investors who bought investment products linked to Lehman Brothers, one of the priorities of the HKMA is to consider the complaints alleging improper selling of financial products by banks. I hope that the results of our investigations, in whatever form, will contribute useful information for the eventual resolution of the matter between the banks and the aggrieved investors. I’m sure everyone understands how important it is for us to carry out this task objectively and without pre-judging the issue. I hope readers will also understand the sheer size of the task: we have received more than 7,000 complaints so far and they are still coming in. But we are making every effort to deal with them as quickly as possible and have now deployed over 100 staff, both our own and some external staff specially hired for the purpose, to this important work. I would also like to ask the affected investors to help us by not submitting multiple complaints. Some complainants have done so and we have had to spend time and resources identifying these duplicates. There is no need to submit more than one complaint.
The Securities and Futures Commission (SFC) has clear requirements governing how investment products should be sold to investors. These requirements are equally applicable to banks and securities firms. In fact, securities firms as well as banks have been involved in the selling of Lehman Brothers minibonds. In supervising the securities business of banks, the HKMA requires them to comply with the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission in selling securities and futures products. This is to ensure a level playing field between the banks and persons licensed by the SFC. The Code requires financial intermediaries selling such products to explain the products and the risks they entail to their clients. The HKMA has required banks to comply with relevant regulations under the Securities and Futures Ordinance and to have adequate internal controls to ensure that they properly assess the suitability of investment products for their customers and adequate disclosure of the nature and risks of the products. Banks are also required to disclose whether they are acting as agent or principal and assure themselves that their clients understand the nature and risks of the product they are buying and that the clients have sufficient net worth to assume such risks and bear any losses that might ensue. The HKMA conducts regular on-site examinations of banks’ securities business and, where weaknesses are identified, issues guidance to the banks requiring them to strengthen their controls. For example, the HKMA issued guidance in March 2006 emphasising the need to exercise special care in explaining products to vulnerable groups, including the elderly. It is against this background that the HKMA is considering the complaints of mis-selling and I can assure everyone that, if we conclude that banks or their staff have mis-sold investment products, we will treat those cases very seriously and take the appropriate disciplinary measures.
The HKMA has also been assisting the Hong Kong SAR Government in its efforts to urge the trustees and the distributors to provide much-needed information to the investors, including the nature of the underlying assets, their prices and their liquidity, all of which will help in the valuation of the financial products in question. This information is now becoming available. Readers will also be aware of the proposal announced by the Financial Secretary on Monday that banks should buy back so-called minibonds from investors at their estimated value. I am pleased that this has received a positive response from some banks.
The financial crisis that led to the collapse of Lehman Brothers is, as some have put it, a rare event that probably occurs only once in a century. Be that as it may, how it played out in Hong Kong raises questions about the adequacy of investor protection. This will be one of the issues that will be addressed in a systemic review that the Government will be conducting. Indeed, the Financial Secretary has requested a report to be submitted to him within three months. Under the relevant laws, the protection of investors is the responsibility of the SFC. But because, in the great majority of cases, investors who have bought financial products through the banks are also depositors, we will also present our views on investor protection in our report to the Financial Secretary.
At this stage, I think quite a few questions will need to be addressed in the review. They are:
| (1) |
whether the current "buyer beware" policy for the protection of investors remains appropriate, in particular in relation to small investors investing in complex financial products; |
| (2) |
if the policy is still considered appropriate, whether or not the mechanism for the approval of the sales documents is appropriate to ensure the comprehensive identification and adequate disclosure of the risks, so that retail investors can take informed investment decisions; |
| (3) |
if risk disclosure under the existing mechanism for the approval of sales documents is found to be lacking for retail investors contemplating investing in complex financial products, how the mechanism should be improved; |
| (4) |
if it is felt that risk disclosure in the sales documents is adequate, whether or not the code of conduct laid down by the SFC for distributors and the additional guidelines issued by the HKMA to the banks involved in such activity are adequate; |
| (5) |
if they are not adequate, how the code of conduct and guidelines should be improved; |
| (6) |
if they are adequate, how best to ensure distributors (the institutions and the frontline staff) follow the code of conduct and guidelines; |
| (7) |
whether the incentive system for the distributors (institutions and front line staff) promotes improper behaviour in order to increase sales volume; |
| (8) |
if there were such improper behaviour, how better to prevent it; |
| (9) |
if the policy for the protection of investors of "buyer beware" is considered inappropriate for retail investors investing in complex financial products, what changes are needed to this policy and how the new policy should be implemented; and |
| (10) |
given the reputation, operational and other risks that banks have been assuming in their involvement as distributors of financial products to retail investors who are also retail depositors, how the banks should better manage these risks, or whether it would be prudent simply not to offer the service to retail investors at all. |
These are the questions that the HKMA has been addressing, but admittedly only from our perspective as the authority responsible for monetary and banking stability. The continuing investigation of investors’ complaints will, I am sure, throw up information that will be helpful in addressing these questions. We will include our answers to them in our report on the investigations to be provided to the Financial Secretary.
Joseph Yam
9 October 2008
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