omplainants as a "best practice" manual. The reports outline the types of allegations made against minibonds distributors. They include:
• Front-line staff failed to consider the risk profile and personal circumstances of their customers, particularly in the case of less-sophisticated, risk-averse investors.
• Front-line staff failed to provide customers with product information or explain product features and inherent risks.
• Front-line staff misrepresented that minibonds were a risk-free alternative to fixed deposits.
These complaints have led to an exploration by the SFC and HKMA as to whether the current regulatory system should be revised.
Let us look at some of the areas of focus in the HKMA and SFC reports and discuss the recommendations proposed.
Product documentation
One of the ways in which minibonds investors were provided information was by way of prospectus. Generally, before shares and debentures are issued, a prospectus is prepared. The SFC authorises and registers the prospectus. This does not mean, however, that the SFC "endorses" the prospectus. Ultimately, the SFC relies on the financial institution (and its professional advisers) to ensure that the prospectus complies with disclosure standards. The increasing complexity in financial products, however, has placed considerable strain on product documentation. The complexity of the product, coupled with issuer's need to protect against liability, has meant that documentation has become inordinately lengthy.
Minibonds investors have complained that product documentation was so lengthy and complex that they did not understand it (despite signing statements to that effect). The HKMA and SFC state in their reports that there is a need for clearer product descriptions with prominent risk disclosures. Regulators have recommended that issuers should provide a "product summary", which sets out in concise, clear language, the main features of the product and its risks. Does providing a product summary resolve the problem? Invariably, distributors will seek to protect themselves by qualifying the summary, and requiring that investors read the underlying documentation in any event.
Nevertheless, there is obvious merit to the argument that documentation written in clear, concise English would be better understood. Product summaries would serve a useful function in outlining investment products in a way that is manageable. The HKMA has sought to further this approach by recommending the introduction of a "health warning system", which delivers simple, clearly discernible warnings as to the risks in relation to retail structured products with embedded derivatives. This recommendation is limited to structured products with embedded derivatives, however, it does highlight that issuers should clearly outline the nature of the product, and its risks to investors. This obligation is nothing new.
Point-of-sale
Another area of complaint from minibonds investors is the way in which minibonds were sold. Currently, in Hong Kong, front-line bank staff can offer the whole spectrum of banking services, from fixed-term deposits to complex investments. Arguably, this allows customers to be steered away from simple, secure products towards riskier, more complex options. The HKMA and SFC have recommended a review of the banking structure which allows banks to use their ordinary business channels to help sell investment products.
There are several
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