• Fri
  • Nov 28, 2014
  • Updated: 1:58am

Small investors must have better protection

PUBLISHED : Saturday, 10 January, 2009, 12:00am
UPDATED : Saturday, 10 January, 2009, 12:00am

During periods of market mania, people can be persuaded to buy all kinds of dodgy financial products. It is not always possible to save investors from their folly, but regulators have a duty to deter financial institutions and their agents from exploiting it. Even the best regulations cannot halt the cycles of boom and bust. But they can at least help check people's euphoria and afford them a modicum of protection.

Unfortunately, it is usually when markets have crashed and investors have lost their shirts that calls are made to revamp regulations and introduce fresh oversight. So it is that the government is calling for new measures to protect investors after the Securities and Futures Commission and the Monetary Authority issued reports on last year's Lehman Brothers minibond fiasco. Some of the proposals intended to be introduced quickly are common-sense measures. The question is not whether they should be introduced but why Hong Kong does not have them already.

Under an immediate review ordered by Financial Secretary John Tsang Chun-wah, administrative measures will be introduced to allow investors a cooling-off period after making a purchase; to force institutions to disclose fully their fees and commissions, including those for their agents; and to train staff better so they understand the products they are selling. A financial services ombudsman has also been proposed. Certainly, having an independent authority to investigate complaints is desirable.

Many banks and brokerages are against the new proposals and have cited spurious reasons for their opposition. They should be ignored. Buyers of consumer products are entitled to know exactly what they are purchasing and how much they are paying. Such protection is one reason why we pride ourselves on being a shoppers' paradise. It should be no different with investors, who are simply buyers of financial products. Yet many complicated investments currently come with hidden charges and fees. And investment disclosure is usually a sorry excuse for long-winded legal documents with fine print that protects the interests of issuers rather than those of customers. This has to change, with new rules to enforce more transparent and user-friendly disclosure to take better care of investors' interests. Just as user manuals are not technical documents but booklets to help customers use their devices, it should be a requirement that financial disclosure documents explain products in plain language.

Most banks use their branches to sell investment products while also handling client deposits. Agents with access to depositors' financial records bombard the latter with sales calls. This has created a conflict of interest and may amount to an abuse of trust. This practice has to end. At the very least, branch staff should be barred from checking customers' bank books and then using the information to push investment products on them without first being asked to do so.

On a broader note, the Securities and Futures Commission has proposed making banks separate their banking and securities services. Should this go ahead, it wants to supervise the securities side of banks. Predictably, Monetary Authority chief Joseph Yam Chi-kwong has resisted the idea, saying banks should remain under its supervision. The two watchdogs have been accused of empire-building. An independent committee should be set up to look into the matter before the government makes any far-reaching decision.

Hong Kong considers itself an international financial hub. But unless we offer better protection for small investors and create a more level playing field, we are not worthy of the name.

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