The Royal Bank of Scotland's Hong Kong branch has agreed to make a repurchase offer to customers holding equity-linked notes issued by Lehman Brothers, although has not admitted any liability.

RBS, formerly ABN Amro, which sold Lehman-backed equity-linked notes to retail clients between July 2007 and May 2008, has agreed to buy them back at 100% of the principal value of each eligible customer’s investment. (This includes notes sold by ABN Amro in Hong Kong before RBS acquired its retail and commercial banking business in October 2007.)

The total value of the repurchase offer is around HK$513 million ($66 million), with Hong Kong’s Securities and Futures Commission estimating that around 540 customers are eligible for the repurchase offer.

The SFC and the Hong Kong Monetary Authority jointly made the announcement yesterday.

The repurchase programme will not be available to professional investors.

The SFC raised a number of concerns with regards to the risk assessment and risk matching process, claiming that some of the risk profile questionnaires were weighted erroneously. As such, some customers’ risk tolerance levels were assessed higher than they should have been, which led to high risk notes being sold to customers with medium or low-risk tolerance levels.

The SFC notes that these processes were “not devised by RBS, which inherited these issues following its acquisition of ABN Amro’s retail and commercial banking business”.

“The problems caused by the errors in ABN Amro’s processes should send a warning to all intermediaries who seek to automate suitability processes with matching systems,” says SFC CEO Ashley Alder. “An automated process cannot replace governance disciplines and professional judgement in assessing whether an investment advice or recommendation is reasonably suitable for the customer.”

Meena Datwani, acting deputy chief executive at the HKMA, notes that this agreement is “in the interests of the investing public as it allows eligible customers to recover the money they invested without the need to go through lengthy and costly legal processes”.

The SFC will not impose disciplinary sanctions on the bank, and its current or former staff with relation to the distribution of Lehman notes.  

RBS acquired ABN Amro’s retail and commercial business in October 2007. Among the notes sold between July 2007 and May 2008, 44 series were outstanding at the time Lehman filed for bankruptcy on 15 September 2008.

The offer price will exclude the amount of the coupon already paid to eligible customers, but will include the additional amount representing interest that would have been earned if the amount invested in the notes had been in a savings deposit at the bank.