Chan calls for banking system to classify product risk and buyers

PUBLISHED : Friday, 04 September, 2009, 12:00am
UPDATED : Friday, 04 September, 2009, 12:00am

The government wants to encourage the banking industry to develop its own standardised method of classifying investment product risks and to formulate a test to assess investors' risk appetite.

Secretary for Financial Services and the Treasury Chan Ka-keung said yesterday that banks could vet and classify investment products as low, medium or high-risk. Lenders could also classify investors, depending on their investment experience and risk appetite, so they could sell them suitable products.

'This will allow investors to easily determine if certain products are right for them. This is a way of improving investor protection,'' Chan told a briefing. 'Ideally, it will be good for the banking industry to work together to develop a standardised classification system.''

He said some banks might have overreacted after the minibond problem and overhauled sales procedures so much that investors could now spend more than an hour filling out test forms even if they were buying simple, low-risk products.

'After the Lehman minibond fiasco, banks have become more cautious and many have tightened the sales process. This is good for investor protection but maybe they are a bit overdone,'' he said.

The spotlight is on investor safety after the minibond fiasco, in which more than 20,000 investors complained about mis-selling of derivative products by banks. The minibonds were investment products issued or guaranteed by Lehman Brothers Holdings. They became worthless when the United States investment bank collapsed in September last year.

Investors complained that some bank staff sold them minibonds without explaining how risky they were. This led to the Hong Kong Monetary Authority ordering banks to test investors' suitability before selling them such products. Different banks have developed different tests, some of which are too lengthy and complex.

'For some low-risk products such as government bonds, they really do not need to make it so difficult for retail investors to buy these products,'' Chan said.

He said it was not appropriate for the Securities and Futures Commission to undertake the product classification and the job should be left to the industry.

Peter Chan Kwong-yue, the chairman of the Alliance of Lehman Brothers' Victims, said the minister's proposals would not improve investor protection. 'The government has not learnt from the experience of the Lehman minibond fiasco,' he said. 'Investors have lost confidence in banks after so many mis-sold products. Investors will not trust banks' assessments anymore.''

Chim Pui-chung, the legislator for the brokerage sector, said it would be acceptable for banks to classify product risk levels but they should disclose if they had an interest in selling the products.

'Banks should clearly inform the investors how much commission they (banks) will get from selling the products. They should also require investors to sign a declaration saying that they are aware of the risk and will take responsibility for any loss that may occur,'' he said.

The minister also said the government would monitor international regulatory reforms to see if more regulation was needed for so-called shadow banks such as hedge funds and investment banks.