HK TIGHTENS REGULATIONS ON SALES OF DERIVATIVES

       Officials in Hong Kong said yesterday regulations on the sale of complicated investment products have been tightened after thousands of local retail investors were burned by Lehman Brothers-backed derivatives last year.
       But lawmakers said the new measures fall short and urged the government to prosecute banks that misled investors and to ban some risky products outright.
       Under the new regulations, banks must issue risk warnings for complex products and record conversations between their sales staff and clients to prevent deception, KC Chan, Secretary for Financial Services and the Treasury, said at a legislative hearing yesterday. The government is also considering setting up an investor education body and a financial services ombudsman, he said.
       The measures come after 30,000 Hong Kong small investors who bought US$1.8 billion (Bt60.2 billion) in Lehman-linked derivatives were left in limbo after the US investment bank collapsed September last year. They weren't fully aware of the risk their investments carried, many of the complex derivatives were innocuously labelled "mini-bonds", angry investors took to the streets.
       Hong Kong regulators announced a settlement with 16 local banks in July that returned up to 70 per cent of principal to the buyers, or up to $6.3 billion Hong Kong dollars (B27.2 billion).
       Opposition lawmaker Ronny Tong criticised the government for not focusing on legal action. "I think it's strange that there is not a single case of prosecution after investigating for more than a year," Tong said.
       Another lawmaker, Albert Ho, asked Chan why the government didn't consider banning certain risky products altogether, as do a number of other developed markets when it comes to selling to retail investors.
       "Your approach is still disclosure-based. As long as you disclose the risks, if the disclosure is fair and comprehensive, you can cell anything. But shouldn't the government exercise discretion and ban certain products that are very complicated, very risky or whose terms are unfair to investors?" Ho said.
       Chan argued disclosure-based regulation is the international norm, adding that the new measures require bank staff to explan their products in layman's terms and assess their clients' appetite for risk.