HK Council enters minibond fray

The Consumer Council for the first time will use its Consumer Legal Fund to help a Lehman Brothers minibond investor sue a bank to recover losses amounting to HK$500,000. Johannes Chan Man-mun, chair of the action fund, yesterday said the case has the potential to be used as a test case to clarify important legal principles and establish precedents for better consumer protection.

He said it was chosen as it involved four major factual and legal issues found in the buying of Lehman Brothers- related products.

"It involves misrepresentation, the exemption clause in the bank, inadequate disclosure of material facts, and the fiduciary relationship between the bank and its consumers."

He declined to disclose any details except that the case does not involve elderly people or the underprivileged.

Chan said they have to be very careful in bringing the case to court as public money is involved, but he is optimistic about the outcome.

He said the litigation might take 1 to two years before being heard at the High Court, and perhaps two years if it goes to the Court of Final Appeal.

Asked if the case will end up like 11 of the 82 applications for legal assistance that were withdrawn after the bank decided to settle, Chan said settlement would be a good thing for the consumer to get at least part of the money back.

The 11 applications were withdrawn after settlement that involved about HK$4.8 million.

He said litigation can begin as early as one or two months from now, as the investor had signed and returned an agreement with the Consumer Legal Action Fund yesterday.

The council up to last Friday received 11,229 complaints related to Lehman Brothers, with 624 out of 943 cases processed reaching settlement with the banks involving HK$217.8 million.

According to the council, the remaining 319 cases are unresolved as the banks have declined to settle.

The council was criticized for taking so long to process the applications after the collapse of the US firm in September last year.

http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=81411&sid=23624060&con_type=1 

Hong Kong Legislative Hearing - Blacked Out Portion Release

Lehman probe 'uncovers five suspect areas'
Minibonds 'mis-selling' revealed

Parts of a report into the Lehman Brothers minibonds saga withheld from the public revealed five categories of suspected mis-selling, a source said yesterday.
These mainly involve the selling of such products to unsuitable investors, the source, who is close to the legislature, said.

The observations were included in a report by the Hong Kong Monetary Authority sent to the financial secretary in January, but were blacked out from the reports disclosed to the public.

Eight pages of the report, which had been blacked out, featured summary observations of more than 200 cases the authority investigated, the source said. Observations on those cases seemed to agree with claims by victims that many had been sold minibonds, but the risks were not fully explained. The report identified the practice of selling Lehman Brothers minibonds to people who were over 65, illiterate or had only primary school education as the most common type of suspected mis-selling.

Hong Kong investors lost billions of dollars on minibonds guaranteed by Lehman when the US investment bank went bankrupt in September. Despite their name, Lehman minibonds are not corporate bonds but complex, high-risk derivatives.
Another category of suspected mis-selling involved the marketing of minibonds to investors just as their fixed time deposits matured, which may have misled them into thinking minibonds were equally low-risk.

The report also identified cases of minibonds being sold in August and September as the extent of the subprime mortgage crisis in the US was becoming clear. The report questioned whether there had been sufficient market analysis before the minibonds were sold. It also noted documentation irregularities such as missing signatures, and indications of an inadequate risk analysis system.

Yesterday, the chairman of the legislature's subcommittee investigating the minibonds saga, Raymond Ho Chung-tai, said its members had unanimously decided there was no justification for the blackout.

He said members would now use this information in their continued questioning of the monetary authority's chief executive, Joseph Yam Chi-kwong, on Tuesday and may include the information in its own report. However, the source said there was a possibility the authority may wish to initiate judicial proceedings against such a disclosure.

An authority spokesman said it had no comment, but the chairman of the Hong Kong Association of Banks warned that disclosure could affect Hong Kong's status as an international financial services centre. "If there is customer information there - it might affect Hong Kong's status as an international financial centre, because if you disclose customer information, then those customers may no longer want to do business in Hong Kong," said Peter Wong Tung-shun, who is also HSBC's executive director. He said the association would send a letter to the authority to reflect these concerns.
Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products, welcomed the disclosure, and said he hoped it set a precedent for the banks to disclose their own internal investigations.

"It also sends an important message because it is a slap in the face of Joseph Yam," he said, referring to the chief executive of the monetary authority

Land banking and property scams

Read this.

Creating or destroying value?

Business should create products that give value to customers. If the cost is $X and the value to the customer is $Y, then the business is entitled to keep the difference to cover its marketing cost, expenses and profit.

For tangible products, the customer can assess the value of $Y by looking at the price of similar products. 

For financial products where the future value is uncertain, such as shares, structured products, life insurance and land banking products, it is difficult for the customer to know the real value. This allows the experts (i.e. financial advisers or businesses) to exploit the ignorance of the consumer by giving misleading advice.

The technique is to give the promise of a future value that is not likely to arise. For example, that the asset will appreciate in value. Usually, this is based on looking at the price movement in the past and selecting a period that shows the most favourable results. This is misleading.

All businesses, if it is runned well, will give a modest rate of return. If inflation is 2% per year, a return of 5% is reasonable. If the business projects a return of 15%, it is not reasonable. The business is taking excessive risk, e.g. through leveraging, or playing a speculative bubble, such as the US housing market (funded by subprime mortgages).

The promoters of these financial products take in a lot of money from investors by making unachieveable promises. They take away a large portion of their money in marketing expenses and profit. The leave the investors with assets that have depleted in value. Eventually, the investors have to realise their investments at a big loss.

Look at the history of many time share, land banking, structured products and life insurance products. While some of these products, give good value, the majority of these products destroy value for the investors.

Be careful about these types of financial products. Do not believe that the assets will appreciate in value. Often, there is someone behind that will cream off your gains and leave you with a poor yield.

Tan Kin Lian

 

The case for public transport

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UK: Call to help vulnerable customers

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UK: Banks face fine for poor service

I hope that MAS will implement similar measures in Singapore. Read this.