Under a planned 'mystery shopper' scheme, the Hong Kong Monetary Authority and Securities and Futures Commission will organise senior citizens and pregnant women to act as 'investors' to check on whether banks and brokerages are abiding by ethical sales techniques. SCMP, July 12 Attention, all pregnant women: Are you aware that pregnancy corrodes your brain and makes you stupid? Yes, it does. The HKMA and the SFC, where people know all about these things, have jointly come to the conclusion that you are right up there on this score with gullible little old ladies who listened to bad men telling lies and now have lost all their money, sniff, sniff. Of course, giving birth seems to cure this condition of thickheadedness. The HKMA and the SFC only specified women who are pregnant (present tense, note) and do not seem to think it afflicts mothers. The gullibility of little old ladies would, nonetheless, appear to be constant and universal. Much as you may share my view that few people are quite as sharp with money as little old ladies, including how to play little old lady to regulators to get it back when they have lost it, the authorities have determined that they are the people most easily fooled by investment tricksters. I do not, however, find myself as offended as some brokers evidently have been that investment detectives in disguise will be sent to check that they are forthright with clients in their sales practices and do not apply too much pressure. It's a legitimate technique for monitoring the industry. Of course, it's another matter if the SFC then proceeds to use the testimony of these 'mystery shoppers' to slap big fines on people or send them to jail through our courts of conviction. Inciting people to commit a crime is in itself a crime. I think the SFC understands this or, at least, I hope it does. But I think it's fair game to send offenders notices to the effect of 'one of our shoppers caught one of your employees omitting the 'risks' warning. If any more of your people are caught doing this again, we may get nasty with you'. My sympathy, however, lies with little old ladies and women who may be showing signs of being pregnant. If they are not personally known to the investment sales rep on the other side of the counter, they will doubtless from now on be shunted into the lowest-yielding blancmange investments that anyone can find. They look innocent and thus may be the cops. Do nothing with them but read them the risks paragraphs while praising the SFC and the HKMA to the skies and telling them to put their money in a savings deposit. There it will wither away relative to inflation, but who has ever been in trouble with the investment cops for recommending a savings deposit? My big reservation with this scheme, however, is that its proponents think it may help prevent a recurrence of the Lehman Brothers minibond fiasco. This is unlikely. The Lehman guarantees that underpinned the value of these so-called bonds carried a double AA rating from one of the world's big rating agencies at the time that most of them were sold in Hong Kong. That made them investment-grade and entirely appropriate to retail portfolios. If we had had mystery shoppers back then, they would have had to approve the recommendation. They might have frowned on some of the shorts or equity plays that could have made little old ladies rich, but minibonds would have been given a full stamp of approval. Who could know at the time that the ratings agencies had it disastrously wrong and did not understand the enormous risks of the collateralised debt obligations underpinning Lehman's balance sheet? Most of Wall Street's biggest brains didn't know. How was any junior investment sales rep in Hong Kong to know? Of course, some Wall Street brains did begin to realise what was happening and had cynically raised commissions and other sales rewards for getting the minibond rubbish off their books. This is one of the reasons it was so heavily promoted here. But it was still highly appealing stuff to retail investors. Deposit interest rates had been driven to zero by central bank policies abroad and depositors were looking for anything that could give them any return. Minibonds paid up to 6 per cent and had a double AA rating for protection, just what people wanted. In my view, the SFC will be doing a disservice to retail investors if it promotes the 'mystery shopper' project as a shield that might have saved them from minibonds. This needs to come with a big risk paragraph that says: 'Warning: Nothing can really save you from unscrupulous New York promoters except not doing business with them. Use your head.' I don't think we shall need an addendum for pregnant women.