The Securities and Futures Commission has proposed new guidelines for banks and brokers to avoid a repetition of the minibonds debacle in which sophisticated derivative products were sold to often inexperienced retail investors. Under the proposal, brokers and banks would add a new category of 'sophisticated investor' between the two existing categories of 'professional investor' and 'retail investor', SFC chief executive Martin Wheatley said. The respective categories would reflect investors' experience and ability to sustain investment losses. A consultation paper due out at the end of this month would define 'professional' and 'retail' investors, Wheatley told the South China Morning Post yesterday. If the market endorsed the paper, the new rules could be implemented next year. 'Complicated investment products with derivatives exposure should never be allowed to be sold to investors who have little investment experience,' he said. More than 20,000 investors complained last year that they were misled by staff at 19 banks and three brokerages about the risk levels of investment products such as minibonds which were issued or guaranteed by Lehman Brothers. After the US lender collapsed, these products became worthless. Local investors lost billions of dollars on minibonds guaranteed by Lehman. Minibonds are not corporate bonds, but consist of high-risk, credit-linked derivatives. Besides minibonds, some investors have also complained that they were mislabelled by their lenders as 'professional investors'. Under current law, this refers to someone with HK$8 million in assets and investment experience who is qualified to invest in riskier products such as so-called 'accumulators'. These investors said the mislabelling caused them to suffer losses. Wheatley said 'professional investors' would still be able to buy the most risky products, but the new threshold would be much higher than the current HK$8 million and they would need to prove that they had deep investment knowledge. Under the SFC's proposal, 'sophisticated investors' refers to those with some wealth and investment experience but not enough to be named 'professional investors'. They will be allowed to invest in products with medium levels of risk and some derivative products. But banks and brokers would be banned from selling complicated products with derivatives to 'retail investors' with no or little investment knowledge. Wheatley said banks and brokers must further classify 'retail investors' according to their ages, education level and risk appetite. The consultation paper will also ask if a cooling off period should be introduced, allowing investors to surrender products within one or two weeks to avoid being stuck with inappropriate investments through hard-selling techniques. Kenny Lee yiu-sun, chief executive of brokerage firm First China Financial Group, said: 'The new classifications should be able to help prevent mis-selling.'
