Debate continues on 'professional investor'

PUBLISHED : Tuesday, 01 June, 2010, 12:00am
UPDATED : Tuesday, 01 June, 2010, 12:00am

What constitutes being a professional investor? Should it be someone who has an MBA or who has passed an examination on the stock and futures markets? Or should it be someone who wears a suit and tie as opposed to shorts and a T-shirt?

The Securities and Futures Commission (SFC) last week issued measures to prevent another Lehman Brothers minibond fiasco, but surprisingly did not change the 'professional investor' definition, which emerged as a problem in the aftermath of the debacle.

In the HK$5.2 billion minibond settlement, the banks repaid about 25,000 investors up to 70 per cent of the money they lost. However, hundreds of so-called 'professional investors' were excluded from the deal as it was deemed that they should have known the risks involved in buying the products.

Many investors who had their fingers burned by derivative products known as accumulators complained they were misled by banks into signing a document stating that they were 'professional investors'. The SFC defines professional investors as people with a portfolio worth more than HK$8 million and having at least two years of investment experience.

However, many retirees and housewives complained that they were encouraged by bank staff to sign the document if they simply had HK$8 million in time deposits.

Some lawmakers have called for the threshold to be doubled, but the SFC rejected the idea, saying the current level was in line with international standards. Instead, the watchdog has issued guidelines for brokers and bank staff to assess the knowledge and expertise of customers who qualify as 'professional investors'. At this point the guidelines appear too vague to offer any detailed examples, brokers say.

Brokers and bank staff say assessment is not going to be easy, which brings us back to the original question: what constitutes a professional investor?

And what about all those retirees and housewives who spend all day in brokerage houses or banks trading stocks, warrants or currencies - should they be called professional investors?

Teamwork needed

It would be a good idea if our securities and banking watchdogs got their act together about the cooling-off period for investors buying certain complex derivative products from banks or brokers.

We are happy that the SFC decided on a five-day cooling-off period to cover investors of any age starting from next month.

This differs from the Hong Kong Monetary Authority rule that will require bank staff, when dealing with investors of 65 years or older or first-time buyers, to wait two days before executing the purchase.

However, sweet lovers will be disappointed by the SFC's decision to ban any bank or broker from offering ice-cream or supermarket coupons as inducements.