Banks must do more after Lehman debacle

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

The latest attempt by 16 of the city's banks to put the Lehman Brothers minibonds affair behind them will see up to 31,000 investors get most of their money back, leaving them out of pocket by HK$3.50 in every HK$100, plus what they would have earned on more prudent investments. It has taken more than two years, with regulators looking over the banks' shoulders, to get this close to full recovery. But some investors can be expected to hold out for the lot as a matter of principle. Given that the whole affair was precipitated by a global financial meltdown, and that it has long been back to business as usual in the markets, this is a reminder that it still weighs on trust in banks and their reputation.

The latest settlement offer has to be welcomed, although with some reservations. There were clearly cases of mis-selling of complex financial products to unsophisticated clients as secure investment vehicles, creating the impression, however misguided, that banks were standing behind them. The elderly and the disadvantaged and their precious nest eggs were particularly vulnerable. Were these the only losers, the moral issue would be more clear cut. But buyers of the minibonds included many more seasoned investors who needed no encouragement to take the risk inherent in higher interest rates. They are doing well to get so much of their money back and can consider themselves very lucky, considering, for example, that people remain 40 per cent out of pocket on HSBC shares bought before the market crash. Hong Kong, after all, is a mature financial market, not an emerging one. If someone is offering a substantially better rate than the safe but solid investment vehicles normally favoured for the savings of ordinary people and retirees, the concept of higher risk for higher reward is generally well understood.

It says something about the way these products were sold that investors who did understand them, and willingly took the risk, have been able to share in the recovery with the real victims and will continue to do so. Administratively, it would have been messy to try to filter them out, but it is difficult to have sympathy for the banks.

The unsophisticated will continue to need protection. The cooling off periods set by regulators, during which buyers of complex or long-dated products can change their minds and get a refund, are a long overdue measure that offers greater protection from predatory sellers and agents. The banks may have paid back billions of dollars, but have they absorbed any lessons from the experience? Measures demanded by the Hong Kong Monetary Authority include segregation of commercial banking and securities investment business. But there is evidence that the sales culture still leaves room for unsolicited offers and promotions to banking customers, including outsourcing of marketing to personnel whose knowledge of the products and training is superficial, and who may depend on meeting quotas for their income and ultimately their jobs. That hardly seems to offer adequate protection to the unsophisticated.

The banks have carved out an important place for themselves in a vibrant market for securities and other financial products. But the minibond affair shows that sales tactics aimed at boosting market share can rebound on their image when things turn sour. Repaying investors most of their losses may enable the banks to move on, but devoting more resources to ensure that marketing of financial products is professionally tailored to the needs and risk appetites of clients would do more in the long run to uphold their reputation and safeguard trust. It would also complement efforts by regulators to improve investor education.