HKDF

Proposal for Resolution of Mini-bond Issue

Background

Around 43,700 Hong Kong people invested HK$15.7 billion in products issued or guaranteed by Lehman Brothers, as distributed by banks (mainly) and brokers. Most of these products were called 'mini-bonds', although they were not bonds but complex and high-risk structured products. When Lehman collapsed on 15 September 2008, many of these products became worthless or nearly worthless. Over 16,000 investors have made complaints to the Hong Kong Monetary Authority (HKMA, the banking regulator), and some to the Securities and Futures Commission (SFC, the regulator of brokers). The Legislative Council has opened an enquiry into the mini-bond affair.

How did such risky products come to be sold in such quantities to retail investors? Regulations are in place in Hong Kong to prevent this:

  • Firstly, the product has to be approved or authorised by the SFC;

  • Secondly, intermediaries (whether banks or brokers) who sell investment products need to abide by the SFC Code of Conduct which requires them to consider the suitability of the investment for their client and to make proper disclosure of the risks to their client. Failure to abide by these regulations constitutes mis-selling.

  • Thirdly, the SFC is responsible for supervising the investment selling activities of brokers and the Hong Kong Monetary Authority (HKMA) is responsible for monitoring the investment selling activities of banks in accordance with the SFC Code of Conduct. The two regulators cooperate under a Memorandum of Understanding.

Analysis

What went wrong? In the event, each of the above links in the regulatory chain failed to function effectively.

  1. The mini-bond prospectus was authorised by the SFC under the Companies Ordinance provisions applicable to debentures. In such case, the main requirement is for the prospectus to make full disclosure (i.e. disclosure-based regulation), and not for the SFC to consider the suitability of the product for the investor (i.e. not merit-based regulation). Nonetheless, the mini-bonds were clearly aimed at retail investors, and were to be distributed in the non-transparent over-the-counter market where the investor would have little access to other information about the product (e.g. secondary market prices, or information on Lehman). The name ‘mini-bond' was also misleading, in that the product was not a bond and did not perform like a bond. The SFC could perhaps have regarded the mini-bonds as investment products under the Securities and Futures Ordinance. In such case the SFC would probably have had stronger grounds to consider suitability and merit, and might well have required modification of the product and communication materials, or even rejected the product altogether. In any event, the SFC's authorisation of mini-bonds for distribution to the general public appears highly questionable.

  2. The banks (and a few brokers) concerned reportedly sold the mini-bonds aggressively to their clients. It is questionable whether the banks had due regard for the suitability of the investment to the client's needs and risk appetite. In at least some cases where the minibonds were sold to elderly unsophisticated investors, it seems rather likely that the banks concerned mis-sold the minibonds.

  3. The HKMA seems not to have focused on the selling practices of the banks. (Review of the HKMA's website reveals little if any material on investor protection or which is intended to educate investors about risks - in contrast, the SFC's website has plenty of such material and the SFC's annual report and mission statement emphasise investor protection.) The HKMA claims to have issued an alert letter to the banks, but it is not clear that this was followed up by effective regulatory audit or review. At any rate, the banks continued selling the mini-bonds to large numbers of clients.

Perhaps almost of more concern than these lapses is the fact that when summoned to Legco, the heads of the two regulators denied that their respective institutions had done anything wrong.

Existing remedies for investors

Mis-selling is a regulatory misdemeanour. It is possible for the SFC to investigate the complaints and prosecute the intermediaries concerned. The SFC is known to be conducting an investigation - although it may take a considerable time. But even if intermediaries are found to have mis-sold and are punished, this will not of itself provide compensation to investors.

The main remedy that would be available to investors is for them to sue their bank for misrepresentation, breach of contract, negligence, as appropriate depending on the circumstances of their case. But this is easier said than done. The investor has to engage lawyers and prepare the case, which takes money and time which many of the affected investors do not have. The investor may lose, in which he has to pay not only his own costs but those of the bank - a daunting prospect for most individuals. And there are many thousands of aggrieved investors. Hong Kong does not have class action rights under which large numbers of individual plaintiffs can sue collectively. Nor does Hong Kong have contingency fees.

The Consumer Council is understood to be marshalling representative cases for a possible suit, in the hope that a favourable judgement would make it easier for other investors to follow. But the process appears likely to be very patchy and incomplete. Meanwhile the banks are identifying and settling the most egregious cases so as to reduce the likelihood of a successful suit.

The HKMA has arranged with the Hong Kong International Arbitration Centre (HKIAC) for a mediation and arbitration service, available to qualified candidates under which the HKMA will pay half the fee and the bank concerned the other half. To qualify, an investor has to have made a complaint to the HKMA and the HKMA reviewed it and referred it to the SFC for consideration; or either the HKMA or the SFC has made a finding against the bank or bank officer concerned.

This mediation and arbitration service may have merit. However, it may take a long time for the HKMA to process all the cases, and also a long time for the HKIAC to process them thereafter. It seems doubtful that the existing 16,000 complainants, not to speak of the entire 43,700 investors concerned, can be handled within a reasonable time frame. Moreover, the process is dependent upon the voluntary compliance of the banks.

Foundation's position

Firstly, on the face of it, all parties bear some share of the blame for the scandal:

  • The intermediaries concerned appear to have acted irresponsibly in selling the minibonds to retail investors. Quite possibly they are guilty of mis-selling, in which case they should be the firms and the officers concerned should be prosecuted and if found guilty punished by withdrawal of licences, suspension, etc, as appropriate.

  • The SFC's authorisation of the minibonds for distribution to retail investors appears highly questionable.

  • The HKMA appears to have failed to properly supervise the selling practices of the banks.

  • The Government has failed to ensure that a proper regulatory arrangement was in place. As the crisis unfolded, it has failed to provide leadership to resolve it.

  • Finally, investors themselves bear some responsibility. Even an elderly and not-well-educated investor should wonder why a product is paying a return much higher than the rate of deposit interest (e.g. 5.5%, compared with perhaps 1% or 1.5% on deposit accounts).

Secondly, there is no adequate existing mechanism for resolution of the crisis.

Thirdly, the crisis should not be allowed to drag on too long, given the delicate state of the global financial market and the likelihood of Hong Kong falling into recession. A near-term resolution is highly desirable.

In order to arrive at a settlement in a reasonable period of time, the following are necessary:

  1. The cases must be assessed and categorised, and then dealt with in batches rather than individually.

  2. There must be active management of the process by the authorities.

  3. While ultimately, both banks and investors have the right to take their disputes to court, reasonable incentives can be applied to encourage the parties to take part in the settlement process. The incentives are, on the investor side the prospect of a part recovery of their money (depending on the merits of their respective cases) within a relatively short time, and on the bank side, the prospect of clearing the issue at a reasonable cost and keeping their reputations intact. Banks that refuse to take part in the settlement process could expect to receive more attention from the regulators in future. And as a further incentive, the Government could consider making a legal aid budget available for investors to sue non-cooperative bank, although it is very much hoped that the banks would be persuaded to agree to a settlement without contest.

In accordance with the above principles, the Foundation recommends that the Government appoint and fund an independent tribunal with appropriate resources (i.e. staffing, premises, IT equipment, legal support, etc) to examine all the cases and provide an indicative opinion on their merit. Given the volume of cases, the tribunal would have to divide them into batches according to their characteristics. The tribunal's opinion could then be used in negotiation with the banks with a view to arriving at a reasonable settlement for all affected investors. There might be a role for the HKIAC in the latter process.

Policy reform

It is clear that the present regulatory structure is not working. In the medium term, the following reforms should be considered.

  1. Dividing responsibility for supervising intermediaries' conduct of business between two regulators has manifestly failed. Consideration should be given to allocating responsibility to a single regulator. One possible model is the integrated regulator approach, under which all financial services are regulated in all aspects by a single regulator. A second possibility is the 'Twin Peaks' model adopted in Australia, under which one regulator (the Australian Securities and Investment Commission) is responsible for supervising conduct of business, the other (the Australian Prudential Regulatory Authority) for supervising capital adequacy.

  2. A statutory cooling off period should be introduced to safeguard investors after making investments.

  3. There should be mandatory disclosure of commissions in the sale of investment products.

  4. Consideration should be given to establishing legal mechanisms to enable consumers or investors to assert their legal rights, e.g. class action mechanism and contingency fees.

  5. Consideration should be given to whether it is appropriate for banks to utilise their customer information to make targeted sales to those customers. Possibly there should be some form of Chinese wall, or even complete separation of mainstream banking and investment sales functions.


Policy Committee, Hong Kong Democratic Foundation
November 2008
 

Reproduction of this paper is permitted with proper attribution to the Hong Kong Democratic Foundation

 

迷你債券的決議提案

背景

大約43700港人投資港幣157億元在銀行(主要)和經紀人發行的雷曼兄弟公司發行或擔保的產品。大多數這類產品被稱為「迷你債券」,然而這些不是債券,卻是複雜和高風險結構的產品。當雷曼2008年9月15日宣佈破產時,這些產品當中許多變成毫無價值或近乎無價值。超過16000投資者向香港金融管理局(金管局,銀行業監管機構)作出投訴,以及部份向證券及期貨事務監察委員會(證監會,經紀人監管機構)投訴。立法會已開始進行調查迷你債券的事件。

怎麼這種高風險的產品大量向散戶投資者出售?香港是有法例可以防止的:

  • 首先,該產品要獲得證監會批准或授權;
  • 其次,出售投資產品的中介機構(不論是銀行或經紀人)必須遵守證監會的專業操守規例,要求他們考慮投資是否適合他們的客戶,並向他們的客戶作出適當的風險披露。不遵守這些規例構成錯誤銷售。
  • 第三,證監會負責監管經紀人的投資銷售活動,而香港金融管理局(金管局)根據證監會的專業操守規例負責監察銀行的投資銷售活動。這兩個監管機構根據諒解備忘錄互相合作。

分析

這是怎麼回事?在事件中,上述監管鏈的每個環節未能有效地發揮作用。

  1. 迷你債券招股章程是由證監會根據適用於公司債券的公司條例規定授權的。 在這種情況下,主要要求是對招股說明書作出充分披露(即以資料披露為本之監管),而不是證監會考慮該產品對投資者的適合性(即不以利弊為基礎之監管)。然而,迷你債券顯然是針對散戶投資者,並分發給在非透明的櫃檯市場令投資者將很難獲得關於產品的其他資訊(如次級市場價格,或關於雷曼兄弟的資料)。該「迷你債券」的名稱也具誤導性,在於該產品不是債券,並沒有如債券一樣的業績表現。證監會或許根據證券及期貨條例把迷你債券看作投資產品。在這種情況下,證監會可能有更強有力的理由考慮適合性和利弊,並且很可能需要修改產品和宣傳材料,甚至完全拒絕接受該產品。在任何情況下,證監會對迷你債券分配給一般公眾的授權,看來是非常值得懷疑的。
  2. 據報導有關的銀行(和一些經紀人)積極出售迷你債券予其客戶。銀行有否以客戶的需要和風險容量充分考慮到投資的適合性是值得懷疑的。至少在一些情況下,出售迷你債券給年長不成熟的投資者,似乎有關銀行相當有可能是錯誤銷售迷你債券。
  3. 金管局似乎沒有把重點放在銀行的銷售方式。(金管局網站的審查顯示,幾乎沒有任何保護投資者或教育投資者風險的資料 - 相反地,證監會的網站上有大量這樣的材料,以及證監會的年度報告和使命聲明強調對投資者的保障。)金管局宣稱已向銀行發出警告信,但目前尚不清楚,這是否有有效的監管性審計或審核跟進。無論如何,銀行繼續出售迷你債券予大量的客戶。

也許幾乎更令人關注的不是這些失誤,而事實是當被傳喚到立法會時,兩個監管機構的主管都否認其各自的機構有做錯任何事。

對投資者現有的補救辦法

錯誤銷售是一個監管輕罪。證監會調查投訴和起訴有關的經紀是有可能的。證監會正進行調查是已知的-儘管它可能需要相當長的時間。但是,即使發現中介經紀有錯誤銷售和受到懲罰,這本身並不會提供補償給投資者。

主要可行提供給投資者的補救辦法將是,他們在酌情視情況而定的情況下控告他們的銀行的失實陳述、違反合同、疏忽。但是,這說起來容易做起來難。投資者聘用律師和準備訴訟需要時間和金錢,這卻是許多受影響的投資者沒有的。投資者可能會輸掉,他不僅要支付他自己的訴訟費用,還要支付那些銀行的-對大多數個人而言,這是一件令人沮喪的事。而事實是有成千上萬的受害投資者。香港沒有集體訴訟的權利提供大多數個人原告可以集體起訴。香港也沒有應急費用。

消委會被理解為引領具代表性的事例作出可能的訴訟,希望有利的判決會為其他投資者帶來更容易的跟進。但是,這個進程可能會出現非常零散和不完整。與此同時,銀行正識別和解決最惡劣的個案,以減少成功訴訟的可能。

金管局已安排了香港國際仲裁中心(HKIAC)為合資格的人仕,提供調解和仲裁的服務,金管局將支付一半的費用而有關的銀行支付另一半。要合乎資格,投資者要已經向金管局作出了投訴,而金管局審查了,並把投訴轉交證監會審議;或金管局和證監會任何一方須對銀行或銀行的有關人員作出了調查。

這調解和仲裁服務可能有可取之處。可是,金管局可能要花很長時間處理所有的案件,而香港國際仲裁中心其後也需要很長的時間去處理。似乎令人懷疑的是,如何在一個合理的時限可以處理現有的16000投訴者,更不用說所有43700投資者。此外,該進程取決於自願遵守的銀行。

香港民主促進會的立場

首先,從表面上看,各當事人為這個醜聞承擔一定的責任

  • 有關的中介經紀似乎有不負責任的向散戶投資者銷售迷你債券。他們很可能犯有錯誤銷售,在這種情況下,應該對有關的機構和人員進行起訴,如果罪名成立,應該適當地處以吊銷牌照、暫停牌照等處罰。
  • 證監會對授權迷你債券,分配給散戶投資者,似乎非常值得懷疑。
  • 金管局似乎未能妥善監督銀行的銷售方式。
  • 政府未能確保有適當的監管安排。隨著危機的顯露,政府未能提供領導去解決問題。
  • 最後,投資者自己承擔一些責任。即使是長者和未受過良好教育的投資者亦應該懷疑,為什麼一個產品可以有遠高於存款利息利率的回報(如5.5 %與存款帳戶或許1 %或1.5 %的相比)。

第二,目前沒有足夠的現有機制解決危機。

第三,基於全球金融市場的微妙狀態和香港陷入經濟衰退的可能性,不應該容許危機拖延太長時間。短期的決議是非常可取的。

為了在合理的時間內達成一個解決,以下是必要的:

  1. 必須將這些事件評估和分類,然後分批、而不是個別處理。
  2. 當局必須積極管理進程。
  3. 雖然最終銀行和投資者都有權將其爭端提交給法院,但是合理的獎勵可用於鼓勵各方參與解決進程。該獎勵辦法是,投資者一方在較短的時間內可能取回他們部分的錢(視乎各自的情況下),在銀行方面,可能在一個合理的費用和保存完好的聲譽下解決問題。拒絕參加解決進程的銀行可以預期在今後的監管中受到更多的關注。儘管希望銀行將被說服不爭辯並同意一個和解,但作為進一步的鼓勵,政府可以考慮成立法律援助的預算,為投資者提供起訴不合作的銀行。

根據上述原則,本會建議政府撥出適當的資源任命和提供資金予一個獨立的仲裁法庭(即配備職員、場所、IT設備、法律支援等)審查所有的案件,並就其可取之處提供指示性意見。鑑於案件數量,仲裁法庭將根據各自的特點分類。仲裁法庭的意見可用於與銀行談判,以期達成一個為所有受影響的投資者的合理解決。香港國際仲裁中心在其後的進程可能有作用。

政策改革

很明顯目前的管理結構是行不通的。從中期看,應該考慮以下的改革。

  1. 劃分兩個監管部門之間對中介經紀的業務經營的監管責任明顯失敗。應考慮將責任分配給一個單一的監管機構。一個可能的模式是綜合監管的辦法,規定由一個監管機構管制所有金融服務的各個方面。第二種可能是在澳洲採用的「雙峰」監管模式,其中一個監管機構(澳洲證券及投資事務監察委員會)負責監督業務的行為,另一個(澳洲審慎監管管理局)負責監督資本充裕水平。
  2. 應該引入法定冷靜期以保障作出投資決策之後的投資者。
  3. 應該有強制性的披露銷售投資產品的佣金
  4. 應考慮建立法律機制,維護消費者或投資者的合法權益,如集體訴訟機制和應急費用
  5. 應考慮銀行利用他們的客戶資料,以便向他們的客戶作針對性的銷售的做法是否適當。也許應該有某種形式的中國牆(職能劃分制度),甚至是完全隔離主流銀行和投資銷售的職能。


香港民主促進會
政策委員會

2008年11月

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