Regulators should push retail investors to take more responsibility for their investment decisions, argued panelists at an event organised by Hong Kong’s markets watchdog.
But political pressure since the 2008 financial crisis has forced some jurisdictions to focus more on investor protection, at the ultimate expense of market innovation, said financial executives last week.
“We are getting dangerously close to a situation where investors have a win-win situation where they ask for capital simply because there was a loss,” says William Strong, Morgan Stanley’s Asia-Pacific co-CEO. “We can’t get into a situation where effectively they say ‘heads I win, tails the industry loses’.”
This creates moral hazard, as some investors will take on a greater amount of risk under the assumption that any losses will be borne by others, Strong told the SFC Regulatory Forum 2014.
Strong did not name a specific jurisdiction, but Mark Stewart, executive director at the Securities and Futures Commission, was quick to defend the regulator’s role in handling the minibond crisis in 2008. Tens of thousands of retail investors had protested in the streets after suffering losses on Lehman Brothers-backed collateralised debt obligations.
“The perception was that everyone was getting some money by simply asking for it, but in reality, those were very careful considerations,” Steward says. “We were only able to do things for people where there was an established… misconduct [between the distributor and the investor].”
These comments come as China is reportedly on the verge of defaulting on a trust product distributed by state-owned Industrial & Commercial Bank of China, according to Bloomberg, citing Guangzhou Daily.
The way things are heading, governments will have to stand behind banks, and banks behind the products they distributed "even if they didn’t explicitly guarantee them", argues David Webb, a Hong Kong-based shareholder activist. That is particularly the case in non-democratic jurisdictions, where a government's ability to protect the public will legitimise its mandate, he suggests.
Webb also highlights some similarities between the current situation in China and the start of the 2008 financial crisis, when two subprime hedge funds managed under Bear Stearns collapsed in July 2007.
He argued that Hong Kong should consider creating a distinction between a salesperson and an adviser. “You can’t have someone sitting in a bank on commission saying ‘we are your adviser’. It has to say instead ‘I am not your adviser’ in a very clear key fact statement.”
He also argues that financial product terminology should be simplified, particularly around bonds, such as detailing how much capital is guaranteed. “If you don’t understand the statement, then don’t buy the product,” Webb says. “There ought to be a few simple sentences … that make it clear and you know you don’t get something for nothing.”
Meanwhile, Steward was pressed on the once-strained relationship between the Department of Justice and the SFC – he acknowledged the problem did exist for a time.
Tensions between the two institutions became public last August when the regulator accused the Department of Justice, then under the leadership of Kevin Zervos, for not prosecuting “serious and complex” cases referred by the SFC.
But Steward says the newly installed chief prosecutor at the Department of Justice, Keith Yeung, marks a new chapter.
“There are absolutely differences in opinion with the former DPP [director of public prosecution] about the merits of cases,” notes Steward, “but with [Yeung] now as DPP, we have someone who has general experience in criminal law practice from both sides of the fence, both prosecuting and defending.”
“We have someone who has direct experience in markets cases as well, so I think the dialogue with [Yeung] is remarkably different to what it was, and that will be for the better.”