DBS to repay derivative customers with interest

PUBLISHED : Thursday, 15 July, 2010, 12:00am
UPDATED : Thursday, 15 July, 2010, 12:00am

DBS Hong Kong will repay HK$651 million to 2,160 customers who bought its high-risk derivative products, becoming the first lender to refund both the original investment as well as interest in the scandal that started with Lehman Brothers minibonds.

However, not everyone will get refunds on the Constellation Notes, complex and risky credit derivative products. The bank is refunding money only to the 60 per cent of its investors it had assessed as being able to accept only a low or medium level of risk.

The remaining 1,240 customers will not get a refund because the test showed they were aggressive investors who wanted high-growth products, according to a settlement agreement the lender made with the Securities and Futures Commission and the Hong Kong Monetary Authority.

SFC chief executive Martin Wheatley said the DBS agreement 'will serve as useful guidance for other banks and intermediaries who also sold this product in the resolution of complaints from lower-risk customers'.

Thirteen other banks and four brokers sold Constellation Notes for DBS.

DBS, as well as many other banks, usually classify customers into different groups by asking them to fill in questionnaires to gauge the risk levels they can shoulder. DBS divided investors into five grades, from the most conservative to the most aggressive. But regardless of the grading, all of them were sold the Constellation Notes.

The notes, like the minibonds issued or guaranteed by Lehman Brothers, are not corporate bonds but complicated investment products linked to the credit of Lehman Brothers. They became worthless when Lehman Brothers filed for bankruptcy in September 2008.

More than 20,000 customers complained that staff at banks or brokers had misled them into buying the products. This led regulators to investigate and eventually resulted in different forms of settlement.

DBS has the highest repayment ratio among all lenders. A year ago, 16 banks which sold Lehman minibonds agreed to repay 60 per cent of the initial investment to investors below the age 65, and 70 per cent to those above that age. Almost 25,000 of their customers have accepted a total of HK$5.2 billion in settlement.

Three brokers - Sun Hung Kai, KGI Asia and Grand Cathay Securities - repaid 100 per cent of the initial investment to minibond holders, but they did not pay any interest.

Democratic Party legislator Kam Nai-wai said the DBS settlement was fair and should be a benchmark for other settlements.

DBS said it resolved the investors' claims without admitting liability. Settling was 'in the interests of our relationships with our customers and in the broader interests of the Hong Kong financial system', it said.