Hong Kong mediation centre aims to end Lehman minibonds investor pain
Small investors can take their cases against banks and brokers to the Financial Dispute Resolution Centre for quicker settlement
Although the taxpayer-funded Financial Dispute Resolution Centre has handled far fewer cases than expected in its first 10 months of operation, industry players say it has made banks and brokers handle client complaints more seriously.
The FDRC, which started operations in June last year, was set up in the wake of the Lehman Brothers minibond fiasco in late 2008 in which more than 20,000 investors complained that they had been misled by banks and brokers into buying products linked to Lehman. They were left out of pocket overnight after the US investment bank collapsed in September 2008.
Many customers complained their banks and brokers had treated them as so-called professional investors - a designation given to those with substantial investment experience and having a portfolio worth more than HK$8 million. Some complex and risky products may only be sold to such investors, and not to normal retail investors.
Some retail investors complained they were treated as professional investors to allow them to be sold risky products such as accumulators, equity-linked notes and high-yield bond products. They suffered huge losses when the global financial crisis hit in 2008 and 2009.
In the past, investors who could afford to would hire lawyers to sue banks in court, but not all who felt they had been cheated had the financial resources to do so. That prompted the government to set up the dispute resolution centre to provide mediation and arbitration services for customers claiming up to HK$500,000 from their banks or brokers.
The FDRC, which cost HK$15 million to set up and requires HK$55 million a year to run, will be funded by the government, the Securities and Futures Commission and the Hong Kong Monetary Authority for the first three years, and by financial institutions thereafter.
Teresa Cheng Yeuk-wah, the chairman of the FDRC and a lawyer who has handled many mediation cases, said mediation or arbitration was a cheaper and quicker way for investors to resolve their disputes with banks or brokers, compared with going to court.
"There are a lot of benefits to settling disputes by way of mediation or arbitration. We are not trying to decide who is guilty or wrong. We find a solution that the financial firms are willing to offer and the customers are willing to accept," Cheng said.
The mediation can be completed in a standard four-hour session. The bigger cases cost HK$12,000, of which the customer pays HK$2,000 and the financial institution HK$10,000. If the mediation process fails, investors can apply for an arbitration ruling on whether the financial institution in question must pay compensation.
The results of these arbitrations can be appealed in court.
But the existence of the centre is apparently not widely known. In the first 10 months of its operation, it took up only 130 cases. Of these, only 28 complaints went to mediation, with 12 of these ending with agreement and two needing to go to arbitration. The rest are still being processed.
The numbers fall short of the expectation that the centre would handle about 1,000 cases a year.
Cheng said this might be because of a low level of awareness of the FDRC.
"We are doing a lot of promoting of the benefits of mediation and arbitration," she said.
After a recent television advertising campaign, the number of inquiries increased by 30 per cent in one month.
Cheng said the centre had received 1,540 inquiries, with about half of them out of its jurisdiction. The FDRC handles mediation for financial disputes between customers and the licensees of the SFC and the HKMA, which include banks, brokers and fund managers. It does not cover insurance agents.
The centre can also only handle disputes within a year of the complaint. Brokers cite the HK$500,000 maximum claim as the reason why the centre attracts little attention.
"It is far too small an amount for many investors," said Joseph Tong Tang, an executive director of Sun Hung Kai Financial. "Even if the limit were to increase 10 times, it would still not cover the major clients of many banks and brokers."
Tong said the centre should increase the ceiling, a suggestion that Cheng said could be considered.
A broker, who did not want to be identified, however, said the centre might not have handled many cases but had made an impact. "Many banks and brokers now pay more attention to complaints by customers. They tend to handle the cases more seriously," the broker said.
The FDRC keeps individual cases confidential but informs the regulators if it finds large-scale malpractice or misconduct.
Cheng wants the centre to help solve the problems of consumers and strengthen international investors' confidence in the city.
"We want to make sure more overseas investors have confidence in the market," she said. "This is why we should offer the FDRC as an affordable way to solve financial disputes between customers and their bankers or brokers."