HKMA, SFC 'ineffective' in Lehman bonds fiasco

Hong Kong's 'largely ineffective' financial regulatory framework led to blunders that cost investors billions of dollars during the Lehman Brothers fiasco in 2008, a Legislative Council report has found.

The report said the fact that the Hong Kong Monetary Authority and the Securities and Futures Commission were separate entities prevented them from adequately responding to irregularities in Lehman's minibonds and structured financial products.

The report also said former HKMA chief Joseph Yam Chi-kwong should bear 'ultimate responsibility' for investors' losses, as he was chief of the banking watchdog at the time.

The HKMA regulates banks' securities businesses, while the SFC regulates brokers and approves financial products. But in this case, neither body acted to prevent the selling of high-risk products by local banks to ordinary investors.

The SFC should become the single regulator, instead of the current split model, said the report by a subcommittee investigating problems arising from the Lehman debacle.

'The securities business of banks being regulated by both HKMA and SFC [is] largely ineffective. The [city] administration and the regulators should examine the feasibility of placing the securities business conducted by banks under the regulation of SFC,' the report said.

'Mr Joseph Yam should take ultimate responsibility for HKMA's failure to detect and rectify problems related to the sale of investment products before they became widespread ... and should be reproved.'

The report also expressed 'great disappointment' with former SFC chief executive Martin Wheatley and 'disappointment' with two top Hong Kong officials.

Financial Secretary John Tsang Chun-wah and Professor Chan Ka-keung, secretary for financial services and the treasury, failed to 'initiate improvements to the regulatory framework' as structured products became more popular in the years before Lehman's collapse.

Some 43,000 investors in Hong Kong who bought Lehman-Brothers-related financial products, amounting to some HK$20.2 billion, incurred huge losses. Although some investors recovered a portion of their investments under settlements with banks, thousands of cases remain unresolved.

The subcommittee said some sales staff at the 16 banks involved in the case might not have adequately explained the products to investors, some of whom had little education or were illiterate. It was found that some investors were convinced to buy the structured products even though their risk profiles could not match the products' risk ratings.

However, Yam, a close aide to former chief secretary Henry Tang Ying-yen, disagreed with the findings of the Legco subcommittee led by legislator Raymond Ho Chung-tai.

'I have adequate grounds to seek a judicial review. But it is difficult to confront the entire political engine with my own force,' Yam said in a statement yesterday.

Ho said at a press conference that the findings were impartial and not politically motivated.

Yam's sentiment was echoed by HKMA officials and three legislators in the subcommittee - Philip Wong Yu-hong, Abraham Razack and Jeffrey Lam Kin-fung - who refused to sign the report and presented their own study yesterday. Wong said Yam should not take the blame for the global financial crisis of 2008, which left no one unscathed.

Finance sector legislator David Li Kwok-po said last night that it was 'extremely unfair' and 'ill-considered' to single out Yam.

An HKMA spokesman said the subcommittee failed to take full account of evidence it presented, particularly on supervisory actions taken before 2008.

A government spokesman said the authorities would study the report's recommendations carefully, but also said the magnitude of the 2008 global crisis exceeded expectations.

The report was the result of a probe that lasted more than three years, during which investors, senior bank managers and government officials were scrutinised. The investigation cost HK$28 million, Ho said.

Legislator Ip Wai-ming said that in light of the report, the supervision of Mandatory Provident Fund dealings by multiple bodies should also be addressed.