What has the minibond fiasco cost our society? Here is my answer, having spent an hour applying for a meagre 50,000 yuan (HK$56,670) worth of bonds issued by the Bank of East Asia.
1.45pm: I entered branch in Festival Walk where it took me 10 minutes to buy some yuan bonds last summer. No queue. I told the sales lady what I wanted. 'The whole process will take an hour. Is that okay with you?' she said.
After giving me the marketing leaflet and a page prospectus, she read me the coupon rate, the maturity and the risk factors:
'BEA (China) issues the bonds and you are relying on its creditworthiness. It has an A-rating.
'The bonds are not secured by any collateral and are not guaranteed by the Bank of East Asia nor any third party.
'Since you may lose everything, it has been graded a low to medium risk investment product.'
(As a business journalist, I think I know what she's talking about.)
1.50pm: She gave me a questionnaire. It is supposed to match my risk appetite against the risk of the product. She talked me through some questions and told me to get prepared. 'Prepared' means:
'Make a good estimate of your personal net worth. By the way, if the size of your subscription is more than 25 per cent of your personal net worth, the bank can't sell you the product without special approval from the branch manager.
'Tell us how much unrealised loss you can bear without remaining uncomfortable. If your answer is below 30 per cent, the bank can't sell you the bond unless you tell us why you want the product so much; sign a separate declaration and the branch manager approves it.'
(Mmm ... so you have to know the 'right' answers in order to avoid the hassles and save some time. That's not too difficult.)
1.55pm: The recording machine was set up. A woman arrived from the operations department whose interest is supposed to be independent from the sales department. After an identity and language confirmation, she began to read me the questionnaire line by line - literally. I couldn't volunteer an answer after the question, but had to wait until she finished with the options.
The 10 questions cover my personal details, investment goals, preferred duration of my investment, investment experience, preferred instruments and performance expectation.
It all went smoothly until I started asking questions. Why are stocks grouped with derivatives and structured products in the choice of preferred investment instrument? What do you mean by 'low to medium degree of risk' in the choice of preferred portfolio performance? There was dead air for a few seconds until she said: 'That's how the questionnaire was designed.'
(Okay, that really helps.)
2.15pm: The sales woman happily told me my score was 48. In the conservative-moderate-moderate-aggressive-aggressive spectrum, I was classified as a 'moderate' investor with a medium risk tolerance. 'You are qualified [to buy the bond],' she happily declared.
(With her earlier advice and my 'tailormade' answers, I was not surprised at all. You see, four points fewer and I would have become a 'conservative' investor and therefore not qualified. That would have happened if I had been honest about some of the answers to questions such as: Do I prefer bonds or guaranteed funds to stocks and derivatives? Would I jump if the unrealised loss was more than 10 per cent? Since I really wanted the bonds, I have to fool the test a bit.)
'There is only one minor problem,' she said. I did not tick the maximum risk tolerance box, that is, I would remain comfortable with an over 30 per cent unrealised loss. Special approval was needed.
2.20pm: The branch manager granted the special approval. The recording machine was on once again. The sales woman began to read line by line from a nine-page document. Not to bore you with the details, here are some examples.
She has explained the product to me? Yes
She has explained risk factors A, B, C, D etc to me? Among them is that 'the issuer was assigned A- long term and A-2 short term counterparty credit ratings with a negative rating outlook. 'Excuse me, what are those ratings?'
'It's all in the prospectus.'
Have I read the marketing material and the prospectus? 'No, I have not.' 'Please read it now.' The machine was off. I 'read' 160 pages within five minutes! The machine was on again. She has explained the risk mis-matching to me? Yes.
2.40pm: It was time for the special declaration that I know I am buying a product that carries risk above my tolerance. Honestly, I was a bit nervous because I was supposed to 'justify' it. 'Value-storing,' I said. Reason accepted. That's it.
2.45pm: I walked out of the bank wondering what each party had gained in the past hour. As an investor do I know more about the product than I had already read in the marketing leaflet? No. And we are only talking about a bond, not any complicated structured product. Do I feel better protected from 'mis-selling'? Not really, because I have fudged some of the answers.
Yes, I will get at least HK$560 in interest payments in the next two years, but I would have gained five times that by investing in Amber Energy's initial public offering and it would have taken me no more than five minutes. And the irony is, I would have been able to subscribe to the bond within minutes if it was listed.
What has the placing bank gained? A maximum of HK$75 commission. I am sure the sales woman has a higher hourly wage than that, not to mention the time spent by the lady from the operations department and the branch manager.
It has also gained a potential liability because the branch manager has 'approved' my decision to invest in a product that doesn't manage my risk tolerance, regardless of the fact that I have walked into it with open eyes.
The regulators who set up the new rules? They can show their critics the stringent measures they have adopted to protect investors from 'greedy sales' techniques. True in some sense. As the lengthy process scares away investors, issuers and placing agents, fewer people will get hurt.
But is this what we want from an international financial centre?