Enforcer sees minibond deal as answer to critics

PUBLISHED : Wednesday, 30 March, 2011, 12:00am
UPDATED : Wednesday, 30 March, 2011, 12:00am

Hong Kong lacks processes to help victims of securities mis-selling get their money back, the chief enforcer of the city's markets watchdog says. But he thinks the buy-back scheme it struck with 16 banks will help address criticism over the saga.

Mark Steward said the scale and intensity of the Lehman Brothers minibond defaults threw up a substantial challenge to the city's regulations for coping with such a crisis.

In Steward's native Australia, victims of misconduct can benefit from compensation proceedings started by the regulator. Britain also has extensive experience in dealing with mis-selling and the Financial Services Authority has specific compensation powers.

The Securities and Exchange Commission in the US can distribute money disgorged from rules violators under the Fair Funds scheme.

'No such processes are available in Hong Kong,' the Securities and Futures Commission's executive director of enforcement told a seminar on prevention of financial crime, management of risk and corruption. Disciplinary sanctions provide for a maximum fine of HK$10 million, but penalising banks with such a fine would be like 'throwing marshmallows into a bonfire', he said.

Steward was speaking after 16 banks on Saturday offered to pay back up to 96.5 per cent of the defunct investments - up from 60 per cent in 2009. But this will only go ahead if at least 75 per cent of an estimated 31,000 investors agree to it.

'Many minibond holders, perhaps egged on by those who wanted to foment local controversy, were forecasting a complete loss so as to justify 100 per cent compensation,' he said.

But the situation was more complicated because it had yet to be established how much of investors' losses were caused by misconduct in Hong Kong and how much by the collapse of Lehman in New York.

For this reason, he said, the commission had used a top-down strategy to investigate the minibond distributors' sales processes, which culminated in a minibond agreement, instead of going through tens of thousands of individual cases.

'Some believe the additional payments to minibond holders are the result of investor protests,' he said. 'We said in October 2008 that our work will not be dictated to by any external pressure for a particular desired result. We have been faithful to that commitment.

'Without these measures, Hong Kong's regulatory system would have been exposed to greater criticism. In the weekend's announcements, that is one risk I think we have prevented from crystallising,' he said.