Bankers beware in Hong Kong

Bankers beware in Hong Kong
By Kent Ewing

HONG KONG - This city's capitalist mantra of "buyer beware" is about to become far more consumer-friendly. "Bankers and brokers beware" could be the new commercial caveat. Or at least that is what some worried banks and brokerages fear will come about this September.

That's when a new "mystery-shopper" scheme, hatched by the Hong Kong Monetary Authority and the Security and Futures Commission, is scheduled to swing into action, with actors hired to play the roles of vulnerable investors similar to those who were duped by unscrupulous sales tactics during the 2008 financial crisis.

The HKMA and SFC have identified senior citizens, young people and - for some reason - pregnant women as primary targets for unethical sellers of investment products, and an unidentified "service provider" is busy hiring and training thespians to play those parts.

The aim is to prevent anything like a repeat of the 2008 fiasco involving the sale and purchase in the city of supposedly safe Lehman Brothers minibonds, but bankers, brokers and financial advisors are screaming "intimidation" and "entrapment" - albeit often from safely behind a veil of anonymity in the Hong Kong media. After all, while they may be fuming, these masters of finance are not stupid enough to have their names and the names of their employers directly linked to an attack on regulators who could, in their dystopian nightmares, revoke their licenses and throw them in jail.

Assurances by the HKMA and SFC that their scheme will focus only on sales of unlisted securities, futures products and structured deposits - exempting listed stocks, futures and warrants - have done little to assuage this furor. That other countries, including Australia and the United Kingdom, have already adopted similar schemes has gone almost unnoticed.

Indeed, judging by the hue and cry emanating (again, mostly anonymously) from the high-flying czars of Hong Kong's investment world, the scheme is not only a terrible affront to the integrity of city's financial system but also a gross apostasy in the history of capitalism in general.

One of the few high-flyers who actually had the courage to speak on the record - Glenn Turner, chairman of the Independent Financial Advisors Association - declared in the South China Morning Post last week that the HKMA and SFC were treating those working in the city's financial services industry like "drug or arms dealers"." Another - Christopher Cheung Wah-fung, chairman of the Hong Kong Securities Professionals Association - went so far as to compare the mystery-shopping scheme to acts of "white terror" committed by the Nationalists against the Communists during the Chinese Civil War.

But complaints like these, coming in the same week that the US Securities and Exchange Commission announced that Wall Street investment giant Goldman Sachs had agreed to pay US$550 million as a settlement against fraud charges related to mortgage-related investments, ring rather hollow, even in capitalist havens like Hong Kong. This was also the week that the US Congress, after a drawn-out legislative fight, approved the biggest overhaul of the American financial system since the Great Depression, with Wall Street kicking and screaming all along the way.

Wall Street's excesses cut deeply in this city, where more than 20,000 investors have claimed that they were misled by banks or brokerages about products linked to Lehman Brothers, the once-proud global investment firm that shocked the world with its declaration of bankruptcy in 2008.

DBS Hong Kong, the local division of Southeast Asia's biggest bank, agreed on Wednesday to repay HK$651 million (US$84 million) to Hong Kong clients who had bought products linked to Lehman Brothers, becoming the first bank to refund the original investment plus interest to customers who purchased risky credit derivatives called Constellation Notes.

According to the agreement the bank reached with the HKMA and SFC, however, only those clients judged to be investors with a low- or medium-level risk profile (2,160 in all) will receive refunds; an additional 1,240 investors with more aggressive risk profiles will be denied.

Hong Kong investors dished out HK$6.5 billion for Constellation Notes, with DBS accounting for HK$1.3 billion of that.

The DBS deal with regulators comes a year after another settlement in which 16 Hong Kong banks agreed to a HK$6.3 billion buy-back from investors burnt in the Lehman's minibonds disaster. The buy-back was, at least in part, a result of street protests by minibonds investors who claimed to be victims of unethical sales practices, while a subsequent HKMA investigation revealed that these complex, high-risk derivatives had been sold to some of the city's most vulnerable citizens - the elderly, the uneducated and even the mentally disturbed.

It was no surprise, then, that a raft of new investment rules followed the HKMA probe. The mystery-shopping scheme is intended to monitor compliance with these rules.

Starting in September, for example, the common Hong Kong practice of offering gift coupons to potential investors as bait will be banned. In addition, banks and brokerages will be required to give a five-day grace period to clients who buy long-term products, during which time their investment can be canceled and their money must be returned. And, as of next January, first-time investors and those over 65 must be allowed a two-day "cooling off" period before the sale of any product goes through.

While the HKMA and SFC may have seriously underestimated the investment savvy of the average pregnant woman, overall these are humane, common-sense rules aimed at taking the ruthless bite out of Hong Kong's most predatory peddlers of investment products. So one has to wonder why so many in Hong Kong's financial sector are in such high dudgeon about the mystery-shopping scheme. The new rules are simple, long-overdue consumer protections - like laws prohibiting false advertising or deceptive sales practices in any other field - and mystery shoppers are a way of keeping bankers and brokers honest. As long as everyone is following the law, what's to fear? Entrapment? But that, too, let us not forget, is against the law.

The overreaction to just about any proposed form of regulation by many in Hong Kong's business class shows, sadly, that they have learned nothing from the financial meltdown that brought the world to its knees two years ago. An unregulated Wall Street ran amok, and we are all still paying for it. Of course, tighter controls must follow.
The bad news about the new regulations in Hong Kong, however, is that they would have done nothing to stop the sale of minibonds to unsuspecting old ladies who lost their life savings in the crash. Before Lehman Brothers went bust, minibonds carried a double AA rating for protection: You couldn't have asked for a better bet - until, of course, the rating agencies turned out to be totally wrong.
Perhaps "buyer beware" is worth remembering, even in a new era of tighter regulation.

Kent Ewing is a Hong Kong-based teacher and writer. He can be reached at kewing@hkis.edu.hk.

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