Hong Kong’s Regulators “Ineffective” In Lehman Minibonds Scandal

Tara Loader Wilkinson

7 June 2012

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.