Hong Kong Monetary Authority

Banks oppose call for SFC oversight

PUBLISHED : Thursday, 07 June, 2012, 12:00am
UPDATED : Thursday, 07 June, 2012, 12:00am

Stockbrokers have welcomed a Legislative Council subcommittee report's call for a single body to regulate the investment market.

However, bankers oppose any change from the status quo in which the Securities and Futures Commission (SFC) supervises brokers, and the de facto central bank oversees financial institutions.

The Legco report suggests the SFC replace the Hong Kong Monetary Authority as regulator of banks' securities departments.

The subcommittee spent three years studying the alleged improper selling by banks of risky minibond products issued or guaranteed by Lehman Brothers. When the US investment bank collapsed in September 2008, the products became almost worthless, sparking complaints to the HKMA and SFC from more than 30,000 investors that they were not told of the inherent risks.

'This is a fantastic idea. For decades, the stockbroking industry has urged the government to let the SFC regulate banks' securities departments, because the HKMA has adopted a less stringent approach than the one that the SFC imposes on brokers,' said Jojo Choy Sze-chung, chairman of the Institute of Securities Dealers.

'The minibond fiasco showed that we had grounds for complaint. Letting the SFC regulate bank securities departments is fair and will improve investor protection.'

Brian Fung Wei-lung, chairman of the Hong Kong Securities Association, said making the SFC the sole regulator would prevent regulatory gaps and confusion. 'The current regulatory model is confusing for investors,' Fung said.

But banks said the idea would effectively make them accountable to two government bodies.

'If the SFC regulates our securities department, we have to face two regulators,' said one bank's securities department head.

Angelina Kwanm, executive managing director of Reorient Financial Markets, also had reservations about another proposal made in the report, which suggests banning some inexperienced investors from buying complicated investment products.

'As long as investors understand the products, they have the freedom to invest. The key issue is rather whether brokers or banks have clearly explained the products to investors,'' she said. 'It's hard to implement such a ban, as it's hard to determine what products and which investors should be banned.''

However, she said she supported the concept of a single regulator, and endorsed another suggestion in the report to give regulators the power to seek compensation for investors.

David Li Kwok-po, chairman of the Bank of East Asia and a legislator for the banking sector, expressed disappointment at the report's criticism of former HKMA chief executive Joseph Yam Chi-kwong.

'A number of bankers have already expressed their opinion to me that the criticisms contained in the report are extremely unfair and ill-considered,'' Li said, adding that Yam helped steer Hong Kong through the Asian financial crisis in the late 1990s and the global crisis in 2008.

Li also rejected criticism in the report that the HKMA had failed in its supervision. 'As a banker, I know first-hand how carefully the HKMA regulates financial institutions.'

Anita Fung, chairwoman of the Hong Kong Association of Banks, said the banking industry would continue to work closely with regulators 'as part of its ongoing effort to safeguard the interests of bank customers and investors'.

Citibank and HSBC separately said they would study the report and the recommendation.


Key findings and recommendations

Strengthen the supervision of sales by banks through inspections and surveillance.

Regulators should be given appropriate statutory powers to order the payment of compensation when justified.

Certain products should only be sold to designated investors. Setting up criteria for determining such people should be considered.

Investors should not invest in products they do not understand.

Banks should improve disclosure to ensure customers are treated fairly.

The government and regulators should examine the feasibility of placing securities business conducted by banks under the SFC.

The Monetary Authority should continue its work on unresolved Lehman Brothers-related complaints and reopen unsubstantiated cases if more information is available.

Mistakes by officials

Joseph Yam Chi-kwong

Failed to detect sales practices that did not comply with regulations before the Lehman Brothers collapse.

Failed to step up surveillance amid phenomenal growth in sale of securities such as structured products in the years preceding the Lehman Brothers collapse.

Martin Wheatley

Insensitivity over misleading description of minibonds on Lehman Brothers-structured products.

Failed to push in a timely manner for legislative amendments which could have strengthened investor protection

John Tsang Chun-wah

Failed to initiate review of weak regulatory framework covering structured products enforced by both Monetary Authority and Securities and Futures Commission.

Professor Chan Ka-keung

Failed to initiate a review of weak regulatory framework - Chan only became aware of minibonds' existence after the collapse of Lehman Brothers.



Sep 15: Lehman Brothers collapses.

Oct 27: First meeting of the Legislative Council select committee.

Nov 12: Legco passes motion granting the committee the right to exercise special investigative powers.

Dec 19: Select committee meets behind closed doors for first time.


Feb 20: Professor Chan Ka-keung, secretary for financial services and the treasury, testifies for the first time.

Apr 14: Joseph Yam Chi-kwong, then head of the Monetary Authority, testifies.

Jun 23: Martin Wheatley, then chief executive of the Securities and Futures Commission, testifies.

Jul 22: HKMA, SFC and 16 banks reach agreement on repurchase of minibonds.

Dec 11: Financial Secretary John Tsang Chun-wah testifies.


Oct-Nov: Representatives from the Royal Bank of Scotland, Standard Chartered, Citibank, Bank of China and Dah Sing Bank testify at the committee.


Mar 27: HKMA, SFC and 16 banks offer a final settlement that would see investors recoup up to 96.5 per cent of their outlay.

Jun 14: PricewaterhouseCoopers, receiver of the collateral for the minibonds, says up to 97.5 per cent of investments will be returned, as recovery of assets goes better than expected.


May 2: Select Committee meets for the last time.