RBS Agrees With HK Regulators To Repurchase Lehman-Linked Notes Sold To Retail Clients

Tom Burroughes

22 July 2013

Hong Kong regulators have agreed with Royal Bank of Scotland NV – formerly known as ABN AMRO Bank NV - to repurchase equity-linked notes sold over five years ago to retail clients that were related to the now-defunct Lehman Brothers firm. The repurchase could potentially cost as much as HK$513 million.

The notes were sold between July 2007 and May 2008. Lehman Brothers declared bankruptcy in September 2008 in a process that hammered global markets and helped precipitate the worst financial crisis since the 1930s.

“RBS has agreed, without admitting any liability, to make a repurchase offer to all eligible customers holding outstanding LB-ELNs sold by the bank (including those sold by ABN AMRO in Hong Kong before the acquisition by of ABN AMRO’s retail and commercial banking business) at 100 per cent of the principal value of each eligible customer’s investment in the LB-ELNs. Today’s resolution provides them an opportunity to reverse their purchase of the outstanding LB-ELNs,” a statement from the Securities and Futures Commission and the Hong Kong Monetary Authority said.

The SFC said it estimates that about 540 customers are eligible for the repurchase offer, which, if accepted by all customers, will lead to payments totalling approximately $513 million.

Customers eligible under the repurchase offer are retail customers holding outstanding LB-ELNs who were assessed to have a risk tolerance level that was more conservative than the risk rating assigned to the LB-ELN purchased by the customer. Professional investors are not eligible, the statement from the regulators said.

“RBS will also make top-up payments to retail customers with whom RBS has entered into settlement agreements in respect of their holding of outstanding LB-ELNs but would otherwise have been eligible to receive a repurchase offer to ensure these customers are treated in the same way as other customers participating in the repurchase scheme,” it said.

The SFC, which investigated the issue, said it raised a number of concerns with RBS regarding the risk assessment and the risk matching process used by the bank at the time.

“This was a time consuming investigation that involved our investigators combing through tens of thousands of documents and listening to hours of telephone recordings. The problems caused by the errors in ABN AMRO’s processes should send a warning to all intermediaries who seek to automate suitability processes with matching systems. An automated process cannot replace governance disciplines and professional judgement in assessing whether an investment advice or recommendation is reasonably suitable for the customer,” the SFC’s chief executive, Ashley Alder, said.

In view of the repurchase scheme, the SFC said it will not impose disciplinary sanctions against RBS its current or former officers or employees in relation to the sale of the LB-ELNs to RBS’ retail customers (other than professional investors), save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.

The HKMA has also informed the bank that it does not intend to take any enforcement action against their executive officers and relevant individuals.