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Compensation for those who lost their investments û and in some cases, life savings û in the minibonds has been among the main priorities of Hong KongÆs Securities & Futures Commission (SFC) as it has stepped up investigations into investment products that have failed following Lehman BrothersÆ collapse in September last year.
The SFC has issued a reprimand to Sun Hung Kai Investment Services involving inadequate internal systems and compliance controls relating to its sales of the minibonds to its clients since 2002, which the firm says it is already addressing.
"We are very pleased with the outcome that has been achieved and we believe the approach adopted has produced a result which is in the best interests of the investors," says SFC CEO Martin Wheatley.
The settlement with Sun Hung Kai Investment Services is expected to serve as a model for how other pending cases involving the minibonds fiasco in Hong Kong will be resolved.
In a previous interview with AsianInvestor, Wheatley said that in previous cases where there has been mis-selling of products, the SFC has taken action occasionally and has reprimanded people and firms involved, but it has never seen anything in the scale of the Lehman minibonds.
öThe last big case we had was Towry Law, where we forced a settlement from Towry Law. Nothing we have dealt with in the past is as huge as what we are dealing with now,ö Wheatley said previously. ôWe want to make sure that the people who have been mis-sold products get their money back, or at least a portion of their money back."
In 2004, financial advisory firm Towry Law entered into a settlement with the SFC for more than $30 million to compensate investors affected by the collapse of two of its hedge fund offerings.
Sun Hung Kai Financial, the parent of Sun Hung Kai Investment Services, says the compensation û which it calls a ôrepurchase initiativeö û will involve 310 primary market retail customers. The compensation will not materially affect Sun Hung Kai FinancialÆs overall finances and business operation, noting that the affected parties form only a small portion of their total number of clients plus the company remains ôwell-capitalisedö with around HK$20 billion ($2.6 billion) in group assets, more than HK$50 billion ($6.5 billion) in assets under management, custody and advice, and HK$11 billion ($1.4 billion) in shareholdersÆ equity. The cost of the compensation package will also have no bearing on expansion plans, Sun Hung Kai Financial says.
Sun Hung Kai Financial believes that this repurchase initiative represents the best possible solution for its affected customers and is enough to provide them with closure on the failed minibonds.
ôWe understand it has not been an easy time for all concerned, but we believe that this voluntary initiative will bring closure to our affected customers, particularly in light of this challenging economic environment,ö says Sun Hung Kai Financial executive chairman Lee Seng Huang.
A spokesman for Sun Hung Kai Financial says executives of the company will not, at this time, comment on the issue further.
Thousands of Hong Kong investors held Lehman Brothers minibonds, or credit-linked notes, following the investment bankÆs collapse. Angry investors flooded the SFC and Hong Kong Monetary Authority with complaints and marched in the streets last year to complain about how they were misled by selling agents û especially commercial banks û into believing that the minibonds were virtually risk-free.
The decision to reprimand Sun Hung Kai Investment Services and accept the compensation from the firm follows an investigation by the SFC which raised a number of concerns.
Specifically, the SFCÆs concerns involved the adequacy of product due diligence on Lehman Brothers minibonds before they were distributed to eligible clients; the adequacy of training given to Sun Hung Kai Investment Services retail sales staff on the minibonds to enable them to understand the product and all its material risks; the assessment of the level of risk for each particular series of minibonds, the communication of those risk ratings to its retail sales staff and the measures that ought to have been taken to ensure that its sales staff gave reasonably suitable advice by matching the risk-return profile of each series of the minibonds with the personal circumstances of each eligible client; and the record-keeping of investment advice given to eligible clients and any queries raised by them.
Despite agreeing to pay the compensation, Sun Hung Kai Investment Services does not admit any liability or wrongdoing arising from these matters but acknowledges the seriousness of the concerns raised.
Given the high public interest in resolving these issues quickly, to avoid unnecessary costs and expenses and to affirm its commitment to the highest standards of conduct, Sun Hung Kai Investment Services has agreed with the SFC to offer eligible clients to purchase all outstanding Lehman Brothers minibonds bought through the firm at a price equal to the principal amount invested by those clients; and to engage an independent audit firm to conduct a review of Sun Hung Kai Investment ServicesÆ internal control and compliance systems.
If, within 18 months from the completion of Sun Hung Kai Investment ServicesÆ current internal control and compliance enhancement exercise, the SFC finds the same concerns of a materially serious nature as those identified by it in this investigation, the firm's licence will be partially suspended for a period of three years and the firm will not be allowed to sell or distribute unlisted or structured products to clients and provide advice to clients in relation to these products. At present, Sun Hung Kai Investment Services is licensed by the SFC to dealing in securities and advise clients on securities.
The agreement also stipulates that Sun Hung Kai Investment Services must continue to fully cooperate with the SFC on the minibond issue.
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