The SFC's Protection To Investors After Lehman Brothers' Minibonds:
How Effective Is It?

Since the Lehman Brothers filed bankruptcy in September 2008, both individual and institutional investors, especially those engaged in high-risk products transactions, have suffered huge losses from their investments. Thousands of people urged the government to take action upon the mis-selling acts of financial institutions. The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) was hold accountable for its inefficient supervision and investor education and protection. In a professional seminar held by HKU SPACE on 28 September 2011, Dr. Michael Wong of CTRISKS Rating Ltd. stated that the regulatory bodies have in fact done quite a lot to improve local regulatory framework and enhance investor protection and education.

Litigation May Not Always Be The Solution

Dr. Michael C. S. Wong is the chairman and founder of CTRISKS, a SFC-licensed credit rating agency in Hong Kong, and a professor of Finance at City University of Hong Kong. He was a founding member of FRM committee of Global Association of Risk Professionals (GARP).  Dr. Wong published more than 50 academic articles and 4 professional books. In 2002-2011, he was frequently appointed by regulators, governments, central banks, financial institutions and law firms as an independent expert to provide expert reports, to review risk control process, and to architect risk management analytics.  His book "The Risk of Investment Products" was published by World Scientific in July 2011.

“According to the data published on the website of HKMA, complaints on investment products rose sharply to a total of 21,605 cases in January 2010, in which more than half are related to minibonds.” Dr. Wong quoted. Although he witnessed a series of actions carried out by the regulatory bodies, taking it to court may not always help in solving the problem. He explained, “It may be hard to find the investment advisors guilty as the plaintiff need to prove that risks involved are not studied and mentioned during sales process and due diligence is not adequately effected.”

Many of the cases are settled through mediation instead of litigation, stated Dr. Wong, as it is less costly. However individual investors may have to be prepared to take “radical actions” to get into mediation process. Dr. Wong then quoted two examples: Singapore Tycoon Oei Hong Leong vs. Citibank and another case where Banco Santander SA, Europe's second-largest bank by market value, provided compensation deal for selected private-banking clients who lost money in Bernard Madoff's alleged Ponzi scheme. Both cases illustrated banks would usually resort to compensation deals under public pressure.

Learn From a Big Lesson

To mitigate misrepresentation in retail banking, the SFC implemented a set of new rules in early 2009, just a few months after the Lehman Brothers incident. Under the new regulations, banks are required to physically separate investment advisory services from ordinary banking services; assign independent officers to conduct customer risk profiling and keep audio recordings of all transactions. “There were stricter rules imposed on risk warning statements and mystery shoppers programs, to ensure a full disclosure of risks involved and effective implementation of the regulations.” Dr. Wong added.

Another set of rules on classification of clients was also implemented in September 2009, provided respective definitions of professional and ordinary investors. With that in mind, individuals should therefore get a good understanding of our own level of risk tolerance and derivatives knowledge, in order to put ourselves in a better position in case of similar crisis.