The split responsibility between Hong Kong’s regulators renders them “largely ineffective” and is to blame for the Lehman Minibonds scandal, said a report.

The split responsibility between Hong Kong’s regulators, namely the
Hong Kong Monetary Authority and the Securities and Futures Commission, renders them “largely ineffective” and is to
blame for the loss of millions of dollars of investors in Lehman Brothers
structured notes, said a report.

The Legislative Council Report published yesterday, said
that the issues arose from the fact that HKMA and the SFC work as two separate
entities, preventing them from fully realising the problems at stake.

The SFC regulates brokers and approves financial products,
while the HKMA regulates banks’ securities businesses. The report recommended that Hong Kong be overseen by a
single regulator.

 The report added that former HKMA chief executive Joseph Yam
Chi-kwong should bear ultimate liability for the debacle, as it occurred on
his watch.

In 2008 Lehman Brothers filed for bankruptcy – at the time an estimated
HK$20.2 billion worth of Lehman Brothers structured products had been sold
through banks to over 43,700 investors. Many of these investors complained that
the bank staff had not appraised them of the nature and risks of such products.
HKMA had received nearly 20,000 complaints
by December 2008. Although the regulators say much of the money has been returned to investors now, there are still calls for an overhaul of the Hong Kong's securities framework. 

“The securities business of banks being regulated by both
HKMA and SFC is largely ineffective. The administration and regulators...should
examine the feasibility of placing the securities business conducted by banks
under the regulation of SFC,” said the council.

The defense

Meanwhile the SFC issued a note yesterday in response,
saying it will “study the reports, and will continue to work with the
Government and the Hong Kong Monetary Authority in enhancing investor
protection in Hong Kong.”

In defense of itself, the SFC said: “Shortly after
the collapse of Lehman Brothers in 2008, the SFC initiated top-down
investigations into all distributors of Minibonds resulting in agreements with
banks and brokers which have enabled the return of approximately HK$8.88 billion
to more than 35,000 eligible customers, and a further HK$995 million in
compensation under the enhanced complaints handling procedure which remains in
progress.”

“The use of the banks’ commission revenue from the
sale of Minibonds to fund the trustee action to secure the return of collateral,
has provided additional returns to the vast majority of retail investors, who
have received in total between 85 per cent and 96.5 per cent of their initial
investment,” said the SFC.

The SFC said it also implemented a package of enhanced
investor protection measures in 2010 to strengthen the regulatory regime
governing the offering of investment products, and will set up an Investor
Education Centre in the fourth quarter of this year, to take up broader
investor education responsibilities.

HKMA could not immediately be reached for comment.