If you walk into a bank you may spot signs in the teller queue displaying attractive deposit rates in a foreign currency.
If you ask about them, you'll be whisked off to a special room to talk to an investment adviser, who will introduce you to an investment that is commonly sold in Hong Kong: the currency-linked deposit.
Make no mistake, these instruments are big business. A 2012 study by the Securities and Futures Commission found that currency-linked instruments comprised 65 per cent of all structured products sold to the public. That translates into annual sales of about HK$380 billion - and that excludes sales by banks.
But despite their branding, these products are not deposits at all. They are derivatives. The retail investor is selling a put option to the bank. This is a risky bet that often results in losses for the investor, who may not even understand the concept of a put option, let alone its value.
This is how it works. A customer agrees to buy a foreign currency at a set rate for a set period of time. If the market rate for the currency falls below this set rate the investor takes a loss.
In return for taking the risk, a customer gets "enhanced yield". An HSBC fact sheet indicates, for example, that a customer could get paid 13.35 per cent annual interest on a structured product linked to the Australian dollar. All the Australian dollar has to do is stay constant against the Hong Kong dollar for the two-week life of the instrument.
Typically investors buy the instruments for one- to two-week periods, and keep turning them over. They keep making money out of them until they don't - the trade will go against the investors, who will be left holding a chunk of a devalued foreign currency ( Black Swan author Nassim Taleb memorably described such investing tactics as picking up pennies in front of a steam roller).
Most investors would have no clue if they are getting a fair deal for the put option they are selling. The bank knows the value because they understand pricing models and have access to the interbank market, where these puts are traded. Investors have to take it on faith that they are getting a fair price for what the bank is buying from them.
All is fair when there is full disclosure, they say. Banks' information on these instruments is clear. The documentation explains in bold letters that the instruments are structured products that use derivatives and that they are not principal protected.
Hong Kong is unusual in the freedom allowed to banks to trade derivatives with retail investors. Banks are marketing these foreign currency structured products as deposits. HSBC calls its currency-linked structured product Deposit Plus. Bank of China, DBS and Standard Chartered call theirs Premium Deposit.
"The word 'deposit' probably appeals a lot more to unsophisticated investors than calling them currency-linked 'derivatives' - which would be more appropriate," says Tony Noto, a Shanghai-based financial adviser.
Citi last year changed the name of its product from Premium Deposit to Premium Account to "avoid misunderstanding from the public that this is a pure deposit with the protection under the Hong Kong Deposit Protection Scheme", said Josephine Lee at Citibank Global Consumer Banking.
A derivatives expert who wishes to go unnamed says Hong Kong banks last year debated whether to describe currency-linked structured products as "deposits". Some banks changed the name of the instrument, and others did not. "It was an industry-wide concern," the expert says. "The thinking was that the word deposit in the consumer mind means you get your money back. But in the case of any of products where risk is taken … you can lose money."
Francis Edwards, a derivatives and structured products partner at law firm Clifford Chance, says the currency-linked structured investments are not equivalent to a time deposit. "The worst-case scenario is that you could lose all your money. This is ultimately a product that involves embedded derivatives so investors should look beyond any deposit label," he says.
The Hong Kong Monetary Authority says the use of the term "deposit" in the marketing of currency-linked structured products "is not disallowed". Banks, in fact, can call their currency-linked structured products anything they like, because the marketing material for such instruments is not screened by the SFC. The commission decided in 2010 to treat currency derivatives as a "treasury instrument", or a tool for small businesses to manage their currency risks, and not as an investment product for the mass market, which is how banks see them.
Banks are also free to display the instrument's high indicated returns in signs in bank teller queues. The rates for the complex product are presented side-by-side with government-guaranteed time deposits, with all seemingly part of the same family of banking plans.
"Calling these types of products a deposit, and advertising their potential returns next to regular deposit rates is misleading since they are such different products," Noto says.
Bear in mind what this means for a customer. He or she could be standing in line for the teller at a bank and see a sign advertising stellar deposit rates for different currencies. When they approach the teller, they might then inquire about these rates, particularly as Hong Kong dollar deposit rates are effectively zero. The client will then be taken to another room and pitched a short-dated currency derivative.
The South China Morning Post did a mini-mystery-shopping exercise at HSBC to see what this involved, and it turns out the process is streamlined. An adviser said a person taking a Deposit Plus plan needed to fill in a risk-profile questionnaire (standard procedure for any investment) and also watch a 15-minute online video about trading derivatives. She added: "You can fast forward [the video] if you like."
The HKMA says that it lets banks market their investment products in general banking areas, and that it specifically lets banks advertise rates for currency-linked structured products alongside their time deposits.
Does this create confusion? For anyone with lingering questions about whether these structured products are equivalent to ordinary deposits, HSBC spokeswoman Yvonne Chuang says this: "Wherever it is promoted, it is accompanied by an investment warning that it is not equivalent to a time deposit. It is not a protected deposit and is not protected by the Deposit Protection Scheme in Hong Kong."