Bank staff did not understand minibonds: SFC

PUBLISHED : Saturday, 09 January, 2010, 12:00am
UPDATED : Saturday, 09 January, 2010, 12:00am

Sales staff at banks did not fully understand the Lehman Brothers-linked minibond products they sold to thousands of customers, the Securities and Futures Commission has found.

The findings were disclosed in the Legislative Council yesterday when lawmakers questioned the commission's chief executive, Martin Wheatley. The SFC found that most of the minibond distributors did perform some due diligence but it was largely 'superficial and incomplete'.

Some distributors also thought they could conduct less due diligence because the commission had authorised the minibond product prospectus and documentation.

'Many of the distributors did not perform any due diligence or risk assessment at the inception of marketing a minibond series and they only did that several years later,' Audrey Eu Yuet-mee said, reading from the commission's report.

Hong Kong investors lost billions of dollars on minibonds guaranteed by Lehman Brothers when the bank went bankrupt in September 2008.

Minibonds are not corporate bonds, but are high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.

Most customers have accepted compensation from banks, and a Legco subcommittee continues to investigate the debacle.

The SFC found that sales staff were not sufficiently trained to fully understand and properly sell the minibonds. It appears that many staff learned about the products by reading the marketing leaflets and skimming the detailed prospectus.

Staff also required customers to immediately sign a large number of documents, such as risk profile questionnaires, without properly explaining or giving customers enough time to understand them.

'Many of the distributors, however, did not take into consideration the customer information obtained when they were recommending and selling investment products to their customers. Thus the investment advice and recommendation were, in many cases, unsuitable to the customer's investment needs and personal circumstances,' Eu said.

Wheatley said the findings were preliminary observations contained in an internal report to inform the commission's board of the situation as customer complaints about minibonds flooded in. But many lawmakers are keen to find out how many and which banks are referred to in the findings as Legco prepares to call on the banks to testify in its investigation. The findings use words like 'most', 'many' and 'some' and do not specify the banks.

Wheatley said he did not believe the findings would have led to greater compensation for affected investors. Any sanctions against banks would have resulted in small fines, he said.

A total of 16 banks agreed last year to pay back customers between 60 and 70 HK cents for every dollar they invested in the Lehman minibonds as part of a settlement. Most customers have agreed to settle with the banks, according to the Hong Kong Monetary Authority.

The commission does not have the power to force compensation from banks.