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Introduction 3
What are the Lehman Brothers mini-bonds 6
Complying with the Code of Conduct? 10
Securities and Futures Commission: 13
Hong Kong Monetary Authority 16
Banks and Investors 18
Conclusion 20
Recommendation 22
Reference 24

Introduction

Recently there has been a lot of discussion among legislators, regulators and investors concerning the mis-selling of Lehman Brothers’ minibond. In the wake of the collapse of Lehman Brothers, so called ‘minibonds’ have caused a great deal of controversy in Hong Kong. Questions have been raised over the sales and marketing practices of distributors and whether complex structured products are appropriate for the retail market. Since Lehman collapsed on September 15, 2008, many investors have suffered huge losses from their investment. Around 43,500 Hong Kong people have invested with estimated HK$15.7 billion in the minibond. They are mainly distributed by bank and brokers which are under the supervision of HKMA and SFC respectively.

In Hong Kong, minibonds were distributed as retail products from 2003. Minibond is a very complex and high-risk structured products and it is not a bond. It is not intended to sell to the retail investors. As a result, many say that there’s been a failure on the part of the regulatory bodies including HKMA and SFC since they are to be unified into one single body that would be equipped to oversee the issuing and sale of all financial products.

Apparently, regulations are in place in Hong Kong to prevent the risky products come to be sold in such quantities to retail investors. Firstly, the product has to be approved or authorized by the SFC; Secondly, intermediaries 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.

In this report we summarize the principal characteristics of the minibond products, discuss whether the mis-selling occurred and identify issues that financial institutions should take into account when reviewing their selling practices whereas investors should think and consider before committing themselves in financial transactions. We also further emphasis on the liability arising from the mis-selling practices and the party that should bear the largest responsibility in this case.

In addition to HKMA and SFC, we had agreed that the intermediaries (eg. Banks), the government and the investors themselves are also responsible in this case. They might have different weighting on the responsibility but at least, on the face of it, all of these parties should bear some share of the blame for the scandal.

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

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