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SCMP

This article was first published in the South China Morning Post on July 23, 2009. It has been republished online as part of Hong Kong 25, which looks at how the city has changed since the handover, and what its future holds.
By Enoch Yiu and Maria Chan
Banks will repay at least HK$6.3 billion to 29,000 people who bought Lehman Brothers minibonds in what is likely to be the world’s largest compensation package for retail investors.
The agreement involving 16 banks, announced yesterday by the Securities and Futures Commission, means 90 per cent of investors will get back more than 70 per cent of their money from September.
This will effectively allow the banks, who were accused of understating the risks of minibonds, to escape regulatory penalties. Individual investors who do not accept the payout can still sue banks.
Under the agreement, banks will have to hire independent inspectors to check their internal controls to prevent further mis-selling.
“The agreement is a watershed in the regulation of financial services in Hong Kong,” SFC chief executive Martin Wheatley said.
More than 33,000 Hong Kong investors bought HK$12 billion worth of high-risk Lehman Brothers minibonds that became virtually worthless when the US bank collapsed in September. Angry investors have since lobbied the government through street marches and other protests for the return of their money.

Despite their name, minibonds are not corporate bonds but credit-linked derivatives whose worth depends on the health of the underlying assets.
While the deal is expected to be accepted by most, about 80 unhappy investors kept up their protests at the SFC’s offices. They said the bank payout fell short of the full refunds two brokerages have made to minibond buyers. Sun Hung Kai Financial agreed to fully repay HK$85 million to 310 clients, while KGI Asia fully repaid five clients their HK$1.6 million.
Mr Wheatley said the deal was a “reasonable compromise” and pointed out it involved banks repaying more money and more customers than the brokerages.
The Hong Kong Monetary Authority and SFC will cease investigating the complaints of investors who accept the payout.
The 16 banks are ABN AMRO, Bank of China (Hong Kong), Bank of Communications, Bank of East Asia, Chiyu Banking Corporation, Chong Hing Bank, Citic Ka Wah Bank, Dah Sing Bank, Fubon Bank (Hong Kong), Industrial and Commercial Bank of China (Asia), Mevas Bank, Nanyang Commercial Bank, Public Bank (Hong Kong), Shanghai Commercial Bank, Wing Hang Bank and Wing Lung Bank.

The banks will send letters to investors next month. They will have 60 days to decide if they want to accept the deal. Those aged under 65 will receive 60 per cent of the value of their initial investment. Those over 65 will get 70 per cent back.
The banks will also need to repay their combined commission of HK$200 million from selling minibonds to fund legal action to recoup from the liquidators of Lehman Brothers any collateral left in them. Provided the residual value of the collateral is at least 10 per cent, investors will receive at least a further 10 per cent of their initial investment.
A banker involved in the negotiations said: “We believe most investors will accept our proposals because they do not have to wait for a long legal process before getting back their investment.”
HKMA executive director Raymond Li Ling-cheung said the agreement would allow the authority to shift resources to investigate about 9,000 complaints of alleged mis-selling of other investment products.


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July 22, 2009: Bank payouts on Lehman Brothers minibonds to top HK$6 billion

Hong Kong investors protest outside Government House last year over minibonds they claim Lehman Brothers misled them into buying. Photo: Felix Wong

The front page of the South China Morning Post on July 23, 2009.

Lehman Brothers minibond holders take to the street in July 2009. The protesters demanded a refund and urged Chief Executive Donald Tsang to step down. Photo: Ricky Chung

News

Hong Kong

Hong Kong economy

Hong Kong 25

Economy


No penalty for lenders in deal with regulators for Lehman refunds



Banks will repay at least HK$6.3 billion to 29,000 people who bought Lehman Brothers minibonds in what is likely to be the world’s largest compensation package for retail investors.


Hong Kong at 25: Economy

Lehman Brothers