HKMA to banks: go on, gouge your customers
with Tom Holland
Good news for Hong Kong's most rapacious banks: as far as the Hong Kong Monetary Authority is concerned, they can continue to gouge their customers - just so long as the victims are not more than 65 years old, that is.
Yesterday, the HKMA sent a circular letter to the city's banks ordering them to give retail investors in complex derivative products a two-day cooling-off period during which customers can change their minds and back out of purchases.
On the surface, the new rule looks like a significant advance in investor protection. In reality, however, yesterday's circular represents a major victory for the banks in their campaign to resist stricter regulation. The rule it sets out is so watered-down it is hardly worth bothering with.
A mandatory cooling-off period was originally proposed as one of a number of measures intended to protect retail investors following the Lehman Brothers minibond scandal and its revelations of how banks used dishonest techniques to peddle risky structured products to vulnerable customers.
In its consultation document published for comment in September last year, the Securities and Futures Commission suggested a window of between two days and three weeks during which the buyer of an investment product who subsequently had second thoughts could cancel his purchase and receive a full refund minus a reasonable administrative fee.
Although other jurisdictions have similar provisions, the SFC's proposal for such a cooling-off period provoked squeals of protest from Hong Kong's banks.
They maintained that a cooling-off period would introduce a perilous element of moral hazard into investment decisions. They complained that it would allow customers to back out of purchases if the market moved against them or if they found they could get a better offer elsewhere.
What's more, the banks argued that if they had to buy structured products back from their clients, they would be forced to unwind their positions in the underlying instruments, which in illiquid markets would take a long time and be prohibitively expensive.
Neither objection held water. A penalty fee to cover bank administrative costs should an investor back out would have dealt with any danger of moral hazard.
And complaints about the difficulty of unwinding positions were nonsense. Structured products are typically sold over an offer period lasting about a month, with the proceeds only invested once the offer period has ended. So refunding an investor at any point up to a final cut-off involves nothing more complicated than an administrative headache.
The real reason why Hong Kong's banks objected to a cooling-off period was altogether simpler. They were afraid that without a salesman breathing down their necks, customers might change their minds about buying complex and risky structured products like minibonds and demand their money back, which would mean the banks would lose their commissions on the sales.
Still, the banks' arguments clearly carried weight with the HKMA, which yesterday decreed that the only customers to enjoy a cooling-off period would be the elderly aged 65 years or over and first-time investors sinking more than 20 per cent of their savings into a single structured product.
In fact, this provision is not even as generous as it seems. Although banks are required to collect all sorts of documentation from customers showing they are experienced investors, they are allowed to take the customers' word for it that they are not investing more than 20 per cent of their net worth in a single product.
You can imagine how the conversation would go:
Bank salesman: 'Look, the only way I can let you buy this limited-edition super-safe, high-yield minibond is if you go home and fetch full copies of documents showing you have invested in the same sort of thing before.'
Customer: 'That's a real fag. Isn't there another way?'
Salesman: 'Well, yes, there is now that you mention it. You can just sign this declaration that you are investing less than 20 per cent of your net worth and I can let you have your minibond right now.'
Customer: 'Please may I borrow your pen.'
In other words, instead of covering everyone, the HKMA's two-day cooling-off period only really applies to investors over 65, a relatively small proportion of the banks' customer base. The banks must be delighted.
It may be outrageous that the HKMA has watered down a consumer safeguard measure in this way, but it is hardly surprising.
The HKMA's mandate as Hong Kong's bank supervisor is to maintain a strong and stable banking system. Protecting customers' interests barely figures as part of its job.
Quite the opposite in fact: the HKMA wants Hong Kong's banks to be financially as strong as possible, which means it wants them to maximise their profits, even if that means selling high-risk structured products to ordinary retail customers.
Clearly, there is a major conflict of interest involved if the regulator responsible for banking system stability is also charged with protecting customers' interests.
This conflict was implicitly recognised in Britain last week when the new government handed the job of prudential supervision of the banking system to the Bank of England, while leaving the Financial Services Authority with responsibility for investor protection.
The sooner Hong Kong recognises a similar conflict the better, and the sooner we will see an end to watered-down investor protection regulations like yesterday's feeble circular letter from the HKMA.