Martin Wheatley, CEO of the Hong Kong Securities and Futures Commission, says the SFC and other securities regulators around the world are trying to understand how so many retail investors became exposed to complex financial products, to the extent that blow-ups of Icelandic banks could cause serious losses to moms and pops in Hong Kong.

He spoke yesterday at a conference organised by AsianInvestor on the future of fund management, on a panel session regarding regulation that also included a fund management regulatory lobbyist and a tax specialist. James Walker, a partner at Clifford Chance, moderated the discussion.

Wheatley says investors around the world have lost money on complex structured products backed by Lehman Brothers (of which the Minibonds are a branded product line) or through other credit-derivative exposures. Since the investment bank went under in September, the entire spectrum of financial products has been tarnished.

This has led the SFC to realise the extent to which investors have been sold such complex instruments; and the extent to which selling agents didnÆt understand the risks in these products. Things like counterparty and credit risks must be explained, he concludes.

Right now the SFC is investigating the process that has taken the industry to this point, to understand whether issuers and distributors are guilty of mis-selling, and whether they are competent at understanding and explaining the risks of such products.

Second, the SFC is trying to determine what the financial-products regime must look like. This includes macro structural issues, such as which government agencies are responsible for approving and overseeing such products or sales; as well as micro ideas such as a cooling-off period for prospective buyers, or the process used by sales channels to appraise product suitability.

The SFC is consulting with other securities regulators to develop a response to issues such as short selling, regulating credit-default swaps and oversight of unregulated entities. But market players recognise the difficulty in getting a standard response.

Catherine Simmons, vice-president for regulatory and government relations at State Street Bank and Trust, says local political agendas will shape each marketÆs response.

Asian governments lack a centralised policy coordination platform, let alone a single monetary policy structure, unlike Europe. Its financial systems vary. So while they all face the issue of fallout from investor exposure to complex credit products, their responses are not uniform.

For example, many regional governments have guaranteed bank deposits, but these measures vary by time horizon, and what assets are covered û those of foreign depositors or just locals; individuals or corporations; local currency or foreign exchange; and whether such protection incurs a fee.

ôBusinesses must continue to monitor regulatory change û and to engage with regulators,ö Simmons says.

Accounting issues are also in flux, particularly as more investors and fund managers question the wisdom of marking assets to market. But Florence Yip, partner for tax services at PricewaterhouseCooper, says the Lehman bankruptcy will accelerate global moves to accept International Financial Reporting Standards. This will impact tax laws, which in turn will affect revenues on investments and fund products.

ôFund management companies need to understand the impact of uncertainty in tax rules on their businesses,ö she says.

The SFC will submit its ideas to the Hong Kong government by the end of the year, and the financial secretaryÆs office is expected to recommend specific actions by mid-2009. ôI hope by that time the finance industry has returned to something close to normal,ö Wheatley says.

WheatleyÆs overriding philosophy is to avoid knee-jerk reactions, mainly by focusing on the necessary information to be disclosed to investors, rather than micromanaging questions of product suitability. ôMarkets hate sudden change,ö he says, citing moves by other governments to ban short selling. ôWeÆve tried to stay on an even keel.ö

He says the focus of the SFCÆs investigation will be on disclosure of structured products, particularly when they offer capital protection. Product structure determines under which regulator it is manufactured and sold, and the SFC is aware of the problems of this uneven playing field. It is also aware that current standards of disclosure have created documentation so dense that clients donÆt bother to read it, and are overly reliant on tips from distributors.