They're not liable, but they're paying up. That's the deal reached yesterday between 16 distributor banks, the Securities and Futures Commission and the Hong Kong Monetary Authority with regard to investor losses in Lehman Brothers minibonds.

The minibonds weren't mini-sized and they weren't bonds: they were Lehman-backed CDOs that investor groups allege were mis-sold as bonds to retail investors, not just in Hong Kong but also in Singapore and Taiwan.

Each of the banks, which include ABN Amro, Bank of China (HK) and Bank of East Asia, will make an offer to repurchase from each eligible customer all outstanding minibonds at a price equal to 60% of the nominal value of the original investment (or at 70% if the customers were over the age of 65). Customers can retain any coupon payments made so far. This is meant to be a greater amount than what customers would get just from the existing collateral.

Furthermore, if the wreckage of Lehman leads to the recovery of any underlying collateral that is paid to the distributors, they must pay up to 10% more of the nominal value of minibonds to eligible customers.

What of the profits these banks made on commissions from minibond sales? They must kick in an equivalent to the trustee of the minibonds, which is trying to recover said underlying collateral.

Finally, the banks are required to immediately implement "special enhanced complaints handling procedures", says a statement from the SFC, regarding other structured products -- which would include another loss-making series called Octave Notes. They must also appoint an independent reviewer (approved by the SFC and HKMA) and qualified third parties to recommend improvements in their complaints procedures.

Any customers who have previously reached settlement with these banks in relation to minibonds don't qualify for this payout. Nor can they pursue any claims against the banks in relation to these products (unless they decide not to accept the terms of this deal; some investor groups have threatened to continue lawsuits instead to win back more).

"Strong markets, like Hong Kong's, need strong regulations," says Martin Wheatley, CEO of the SFC. He says the deal will allow minibond holders to receive a "substantial" return on their capital, and prompt the banks to upgrade their practices.

The regulators would dearly like to see the minibond fiasco put to rest, and the legions of grannies abandon their protests. A deal with the banks has been reached, which sets a precedent for other markets such as Singapore, where restitution has been private, with undisclosed government prodding.

What this agreement ignores is the gap between what SFC and HKMA allow when it comes to investment product sales -- a gap that contributed to the minibond debacle in the first place. Investment banks found it easy to bang out one structured note after another that distributor banks eagerly sold to naive (and often greedy) investors -- in contrast to the mutual funds industry, which must issue a prospectus and register products with the SFC. Why? Because minibonds, Octave Notes and the rest of this stuff is still considered a bank product, and therefore falls outside of the SFC's review. Until the HKMA and the SFC find a way to regulate this gap, investment banks, distributors and -- yes -- investors will continue to play 'regulatory arbitrage'.

David Li Kwok-po, the chairman of BEA and who represented the banks in their negotiations with the government, expressed pleasure at reaching a deal because it will "benefit Hong Kong as an international financial centre". He didn't mention the other benefit to the banks: legally, they're off the hook. They didn't mis-sell dodgy products to gullible investors.

The other banks are: Bank of Communications; Chiyu Banking; Chong Hing Bank; Citic Ka Wah Bank; Dah Sing Bank; Fubon Bank (HK); ICBC; Mevas Bank; Nanyang Commercial Bank; Public Bank; Shanghai Commercial Bank; Wing Hang Bank; and Wing Lung Bank.

Notably, several local banks are NOT on this list, because they never sold minibonds, including Hang Seng Bank, HSBC and Standard Chartered.