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November 3, 2009

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HK tightens regulation of complex products

HONG Kong officials yesterday said they have tightened regulation of complicated investment products after thousands of local retail investors were burned by Lehman Brothers-backed derivatives last year.

But lawmakers said the new measures fall short, and urged the government to prosecute banks that misled investors and to ban some risky products outright.

Under the new regulations, banks must issue risk warnings for complex products and record conversations between their sales staff and clients to prevent deception, K.C. Chan, Secretary for Financial Services and the Treasury, said at a legislative hearing yesterday. The government may also set up an investor education body and a financial services ombudsman, he said.

The measures come after 30,000 small investors who bought US$1.8 billion in Lehman-linked derivatives were left in limbo after the United Staters investment bank collapsed in September last year. Upset they weren't fully aware of the risk their investments carried - many of the complex derivatives were innocuously labeled "mini-bonds" - investors took to the streets. Hong Kong regulators announced a settlement with 16 local banks in July that returned up to 70 percent of principal to the buyers, or up to HK$6.3 billion (US$813 million).

Opposition lawmaker Ronny Tong criticized the government for not focusing on legal action.

"I think it's strange that there is not a single case of prosecution after investigating for more than a year," Tong said.

Another lawmaker Albert Ho asked Chan why the government didn't consider banning certain risky products altogether, as do a number of other developed markets when it comes to selling to retail investors. "Your approach is still disclosure-based. As long as you disclose the risks, if the disclosure is fair and comprehensive, you can sell anything. But shouldn't the government exercise discretion and ban certain products that are very complicated, very risky," Ho said.


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