Many people in Hong Kong are losing their life savings after finding that the Lehman-Brothers-guaranteed financial products they bought have become worthless paper. The so-called minibonds, allegedly sold to small investors as low-risk products through underhand tactics, are estimated to have cost the victims HK$15 billion. The total value of such products sold in Hong Kong is thought to be as high as HK$30 billion. That means, if other international financial institutions go under, more Hong Kong people may lose their investments.
The Democratic Party was the first to dive into the issue. Other parties have been joining in to help the victims. But government officials in charge of financial affairs have been reacting slowly, allowing politicians to cash in on the opportunity. In face of strong public pressure, officials have begun trying to defuse the bomb. The latest reports suggest that Secretary for Financial Services and the Treasury Chan Ka-keung has personally lobbied the banks involved to press for a solution. Some were said to have reached a settlement with the complainants, but two banks have denied such reports. If not handled properly, the minibond saga could become a governance crisis. There are signs it is heading that way.
Many who were misled into believing that the investment-bank-backed notes were low-risk bonds are old-age retirees. They did not know they were, in fact, buying high-risk derivatives. Those who sold the products zealously at the banks' branches also did not understand what they were selling. With the blind leading the blind, it has ended in a terrible mess, with investors realising that they will have to wait until the liquidation of Lehman Brothers to find out whether they will get any of their money back as creditors. Chances are they will not, through that process.
It is all too clear that the banks have been under very loose supervision when selling financial products to retail clients. The Hong Kong Monetary Authority has no clear rules against misleading selling tactics. The Securities and Futures Commission also feels powerless in the face of numerous complicated derivative products and has switched to a so-called disclosure-based regulatory regime, under which, the onus is on the intermediaries to disclose the risks of the products. The commission has no power to seek compensation for investors. When investors suffer losses, it can only condemn the malpractices, but is unable to do more.
The fury of those who lost all their savings in the scam could turn against the Securities and Futures Commission, the Monetary Authority and the government, and the consequences could be dire. The government should wield its political influence to press the banks to settle with their clients. The first step is to find out where the real problems lie and collect comprehensive information about the minibonds. There are more than 20 different forms of such products, and the government should analyse them thoroughly. If some are still backed by collateral, their market value must be ascertained as it may still be possible to resell them in the secondary market. Only with sufficient information can the authorities and investors decide their best course of action.
Openness is the key to protecting investors. For those who have bought similar products but are still unaware of the risks, only more information will help them make an informed judgment.
