Beware the little old lady

Beware the little old lady - she's a spy for financial watchdogs


Beware the financial watchdogs' spy

That little old lady queuing at the local bank and asking for investment advice may not be who she seems. And that has some in the financial industry worried.

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 bank and brokerages are abiding by ethical sales techniques.

Some in the financial sector have likened the scheme to a "white terror" because of its lack of transparency and fairness. Bankers, who are reluctant to speak out openly, also have their misgivings about the scheme that will start by September.

While the practice is aimed at preventing a recurrence of the Lehman Brothers minibond fiasco, there are concerns that the information gathered by the regulators will lead to prosecutions based on the evidence of "actors".

More than 20,000 investors complained last year that they had been misled by bank staff or brokers about the risk of investment products issued or guaranteed by Lehman Brothers. After the US lender collapsed, the minibonds became worthless.

The mystery shopper scheme has its supporters, including the Democratic Party's Kam Nai-wai. "The mystery shopper scheme is very much needed as the Lehman minibonds fiasco showed there are many mis-selling practices," Kam said. "In fact, I think this scheme should go beyond investment products to other consumer and lending products to make sure retailers and bankers are treating their clients appropriately."

However, those in the financial sector have a different view. Since the SFC and HKMA issued a circular to banks, brokers and financial advisers about the scheme last month, many have expressed concerns.

In the circular, the two regulators said they had jointly engaged a "service provider" to hire the actors. However, the identity of the company was not disclosed, and nor was how it would be paid.

The unnamed service provider will use pregnant women, retirees, housewives or young people who will pose as investors buying products from banks, brokers, fund houses and investment advisers. They will check if the salesman is following new rules about selling suitable products to clients.


From January next year, the HKMA will require banks to give first-time investors, or those aged over 65, a two-day cooling off period before executing buying orders for some investment products. They will also need to obtain the age, education and investment experience of their clients to determine what products are suitable for them.

Sales men and women from September will not be allowed to offer any gift coupons as sweeteners for clients who buy structured products. Banks and brokerage staff will also need to give a five-day grace period for investors who buy long-term products. They can cancel the orders within the period and get their money back if they have second thoughts.

Kenny Lee Yiu-sun, chief executive of brokerage firm First China Financial Group, said brokers were worried that not knowing which customers were the undercover shoppers "will affect the relationships between customers and brokers".

Lee also said the scheme would be unfair to brokers, as it was being managed by a third party, and not the SFC itself.

"The mysterious shoppers are paid to do the job of a spy: how can the SFC prevent these people creating traps to lure brokerage staff?" he said. "We trust the SFC as their people are professional, but these spies are sent from this unknown service provider and are unknown to the industry."

Christopher Cheung Wah-fung, chairman of the Hong Kong Securities Professionals Association, said the SFC was creating a "white terror" by introducing the mystery shopping scheme. "Any one of our clients may be someone sent by the firm hired by the SFC, which makes us all worried," Cheung said.

One banker, who spoke on condition of anonymity, said lenders were uncomfortable about the purpose of the mystery shopper exercise.

"Some banks already have internal mystery shopper schemes that send staff from other departments to test the services of other branches," the banker said. "These schemes run by the banks are mainly for educational purposes and staff members do not receive any penalty, as the purpose is mainly training.

"If the scheme was run by the HKMA alone, we would feel more comfortable, as it would only use the data to remind the banks to do a better job. But it is a different story with the SFC, which is likely to use the information collected for enforcement purposes. Will some of our colleagues be prosecuted by the SFC because he or she says something wrong to a mystery shopper? That is scary."

In their circular, the regulators say they will use the feedback obtained to assess the compliance of financial service providers, including whether they were aware of their clients' backgrounds, had disclosed risks and given suitable advice.

The circular added: "Depending on the findings, certain cases may necessitate follow-up action with the intermediaries concerned." Neither the HKMA nor the SFC spokesmen were willing to elaborate on what "follow-up action" meant.

Glenn Turner, chairman of the Independent Financial Advisers Association, has called for the SFC to rethink the mystery shopping scheme.

"All in all, this is a mess, and the SFC should cease this programme immediately," Turner said. "This method implies that the intermediary is guilty and has to prove him or herself innocent, and he or she has to do this in front of a fake prospect.

"Does the SFC have to spy like this? Entrapment techniques have no place in the financial services industry and should be used for hunting down drug or arms dealers." Turner said the "follow-up action" mentioned by the SFC could be a long list and involve prosecutions. Alternatively, the SFC may also use mystery shopping as part of selection process for awarding or declining licences.


One financial adviser said on condition of anonymity that there was confusion over what constituted mis-selling. "There is no common standard on assessing product risks," she said. "It is therefore difficult to say that investment recommendations are improper."

Chim Pui-chung, the legislator representing the financial services sector, complained that the SFC and HKMA scheme lacked transparency.

"There were no seminars and no briefings to allow the industry to understand more about this scheme," Chim said. "The regulators also have made no announcement to the public. We are being kept in the dark." Spokesmen from both the HKMA and the SFC said the mystery shopper scheme would only focus on selling practices involving unlisted securities, futures products and structured deposits but not listed stocks, futures and warrants.

They said the scheme would help regulators understand how unlisted investment products were sold, assess compliance and identify potential issues.

They both pointed out that Britain and Australia have similar mystery shopping schemes, also offered by an external service provider.

SFC chief executive Martin Wheatley said the reason a third party was required for the job was that commission staff could not "lie" to brokers or fund houses.


12 Jul 2010