DBS minibond sales guidelines and quality control challenged

DBS minibond sales guidelines and quality control challenged


Despite settlements, new risks may be looming with ‘Octave Notes’

By Oswald Chen China Daily

Legislators have zeroed in on DBS Bank (Hong Kong) Ltd’s Lehman Brothers Minibond sales guidelines, calling into question the bank’s selling practices and quality control.

Making her second appearance at the Legislative Council subcommittee dealing with the Lehman Minibond fiasco Tuesday, Amy Yip Yok-tak, chief executive of DBS Bank (Hong Kong), told legislators that staff training and sales kits all contained explicit mention that the product did not offer full principal protection.

Civic-party lawmaker Audrey Eu Yuet-mee said sales scripts detailing four prerequisites for customers, viz., “existing customers of DBS experienced in investing with assets in excess of HK$200,000 and the ability to shoulder risk” were vague and ambiguous.

Insurance legislator Chan Kin-por added most of the bank’s 2,775 complaints dealt with sales staff giving brief explanations about the minibonds that left less-educated customers bewildered as to the product’s risks.

“As long as we rely on human beings and not machines and recordings, we have to believe and trust our staff,” Yip said.

Eu also blasted the bank’s likening of the Lehman Minibond to regular bonds - both of which yield interest payments, but with only the latter being principal-protected - in its marketing.

She also said the sales script provided to the legislature made no mention of the fact that investors’ capital could be wiped out, while other remarks gave the impression that if there were a credit incident, DBS would refund customers.

Yip also denied an accusation that the DBS use of ParkNShop vouchers and a subscription deadline were sales incentives, saying the coupons were market practice and the deadline was necessary since the minibond offering was but one in a series of offerings.

The next hearing will see DBS return Friday while the heads of Standard Chartered will testify May 7.

According to the Hong Kong Monetary Authority’s (HKMA) latest figures released on its website, investigations into the 21,591 cases involving Lehman-Brothers-related complaints received have been 99 percent completed. Investigatory work for the remaining 195 cases is underway. The HKMA, Securities and Futures Commission (SFC) and the 16 retail distributing banks accepted and implemented their Minibond Repurchase Agreement last year to settle the issue.

The settlement of the minibond issue, however, may not prevent another round of shocks related to credit-linked notes in the local financial market. Disputes surrounding the Octave Notes may develop into new crises that may deal another severe blow to the local financial system. The Octave Notes, or the so-called “Smart Bond” in Chinese, are issued by US investment bank Morgan Stanley, through shell company Victoria Peak International Finance.

According to the SFC statistics, more than 8,000 local investors have already poured money into these financial products, in which a total of HK$1.8 billion is still outstanding. Of the total 22 series. Series 10, 11 and 12 of the Octave Notes are related to the bankrupt Lehman Brothers and these series’ values have already dwindled to zero.

The Octave Notes may trigger a more serious blow to the local financial system, as the product is embedded with collateralized debt obligations (CDOs) related to even more reference entities. The other series may also become worthless, given that although the US economy is improving, it cannot be ruled out that some reference entities may go bankrupt. Hence, the Octave Notes issue may be planting another time bomb in the local financial system.


21 Apr 2010