Minibonds probe must not become witch-hunt

PUBLISHED : Thursday, 13 November, 2008, 12:00am
UPDATED : Thursday, 13 November, 2008, 12:00am

The Legislative Council's investigation into the Lehman Brothers minibonds affair will be welcomed by small investors, if not by officials and the banks. In setting up a committee with power to summon witnesses and documents, lawmakers should be mindful of concerns expressed by those who opposed it. The legislator representing the banking sector, David Li Kwok-po, says they are setting a dangerous precedent by taking 'unlimited powers' over banks. A government official likens it to putting the banks on trial. Banks fear pressure at public hearings to disclose details of strategies and business practices. Even Hong Kong's status as an international financial centre is said to be at risk as a result of the inquiry.

This is worrying talk in a city that prides itself on a sound, generally well-regulated financial system. That does not mean, however, that Legco is wrong in this case to invoke its special powers to launch an investigation. The minibonds affair raises legitimate issues of public interest that have remained behind the closed doors of investigations by regulators, and negotiations between banks and aggrieved investors. If elderly people who had been putting their money in time deposits were persuaded by bank staff to buy the minibonds instead as 'low risk' investments, one has to question whether the banks might have crossed a line that they should not have. And if that had happened despite our existing regulatory regime, then for the sake of investor confidence, related issues must be brought into the open and steps taken to prevent a repetition.

That said, there is an onus on lawmakers to exercise discretion, and focus their attention where it will do the most good. The Hong Kong Monetary Authority and the Securities and Futures Commission are investigating thousands of complaints of alleged mis-selling of minibonds. Mediation has been established between banks and clients. Some banks have already made undisclosed settlements. There is nothing to be achieved, therefore, if lawmakers involve themselves in particular cases, except for identifying weaknesses in the regulatory regime.

They should certainly not allow the inquiry to turn into witch-hunt. After all, it is likely that most of the investors are not victims of abuse, but people who have simply exercised poor judgment when making their investments. If this is what the Legco inquiry finds, then the banks have little reason to fear it.

Certainly, a key question will be whether investors neglected to assess the risk against their ability to bear it, or were lulled into a false sense of security because the products were mis-sold as safe investments. But there are two related issues that warrant the attention of lawmakers - the gaps exposed in the regulation of securities marketing and the education of investors. There is a question whether banks' frontline staff were adequately qualified or trained to sell complex financial products to unsophisticated investors. Some bank staff bought minibonds themselves. Lawmakers may be interested to find out whether they knowingly took the risk or believed the sales pitch. As for investors, more must be done to educate them about risk.

Hopefully the Legco probe will help ensure that something good comes out of the minibond affair. At the end of the day the free-market principle of responsible risk-taking must prevail. But every effort must be made to learn lessons from this affair and to ensure a level playing field for small investors who entrust their savings to banks.