These two countries are often compared because of similar geopolitical situations, racial compositions, approaches to economic growth and competitors to be the regional (if not world) class financial markets.

However, the recent Lehman mini-bonds fiasco has shown very different regulatory approaches in resolving the losses suffered by investors.

Hong Kong Monetary Authority: 1

Hong Kong’s recent actions by the Hong Kong Monetary Authorities as well as their Securities and Futures Commissioned has resulted in Lehman mini-bond holders who would be compensated as much as 70% of their principal amounts invested with the banks. About USD 1.6 b (SGD 2.4 b) was invested by Hong Kong investors in Lehman mini-bonds and around USD 800m or (SGD 1.2 b) or roughly 50% would be compensated.

Monetary Authority of Singapore: 0

Singapore’s banks on the other hand are compensating around SGD 107m (USD 71m) out of around SGD 508m (USD 352) or roughly 21% would be compensated. This is half the proportion that the Hong Kong authorities have managed to help broker for their own investors.  Interestingly enough, if the percentage paid by each financial institution in Hong Kong is similar, I suspect DBS in Hong Kong would likely be paying out a higher proportion than DBS Singapore for selling virtually the same product.

The Monetary Authority of Singapore on the other hand, had its Deputy Chairman and Minister for Trade and Industry, Mr. Lim Hng Kiang defending its actions in its supervision and not accepting that it had been lax in supervision.

Different Jurisdictions – Different Outcomes

The compensation obtained by Hong Kong investors is double that of Singapore for the same product and very similar circumstances. Why are Singapore investors suffering more than those in Hong Kong. Based on the news reports about the Lehman mini-bonds fiasco in these two countries, it appears that the Hong Kong authorities was more proactive in being an advocate for the retail investor compared to MAS’s more hands-off approach urging retail investors to avail themselves to first lodge their complaints to the banks and financial institutions before going to FIDReC.

While investors in the ill-fated Lehman related minibonds and other derivative products have suffered, the way their suffering unfolded has been quite different.

On one hand, banks in Hong Kong have to put up a US 200m fund “to help pay legal costs of trying to recover collateral that was backing many of the investments, possibly increasing the payout for investors“.

There were no such reports of similar initiatives in Singapore.

It seems ironic that Hong Kong, better known for its free-market type of approach to financial markets, has emerged to be seen as a stronger proponent for the retail investor.

Singapore, with its reputation of being tops in Corporate Governance in the region and in laws and regulations appear to be letting the Financial Institutions get away with a ban (ranging from six months to two years) on selling these structured notes that no-one aged 9 to 90 with a breath would touch with a ten-foot bamboo pole.

I guess the morale of this story is that perhaps one is better off investing in Hong Kong financial market because you seem to have more protection than as a retail investor in Singapore.

Be well and prosper.

Image by Getty Images via Daylife

DBS has decided to compensate investors in their press release on 22 Oct 2008. In it, DBS admitted that,

…we have found that a number of cases did not meet the standards DBS upholds and the Bank will be compensating these customers with effect from tomorrow.

Evidently, the bank has confirmed that there were some mis-selling although the language used is far more ambiguous. The fact that DBS would be compensating the customers says a lot.

Of course, the debacle is far from over as it is still not clear who will be compensated and how much although it would be to the tune of $70-80 million out of $360 million sold to investors in Singapore and Hong Kong. That means that likely each investor will get 20%+/- back from their risky Lehman Brothers related investments assuming all investors are compensated. However, until more details are released, the public won’t know the extent and nature of the compensation packages.

Living Happily Ever After

The Lehman Brothers debacle has tarnished DBS’s reputation. Will they be able to walk away from this debacle in a fairy-tale manner and live happily ever after?

More importantly, given that two-thirds of the product were sold to Treasures (i.e. Private Banking/High net worth) customers. Would these people be able to trust DBS again?

Only time will tell, but based on how the debacle has turned out, it is unlikely that the bank will be able to regain the trust of its customers especially when it comes to investment advice for financial products that are beyond pure vanilla current, savings and fixed deposits. While there has been mention that banks have also been selling unit trusts and technology funds that have tanked, the difference then and now is that people understood unit trusts far better than they understand structured deposits or credit-linked derivatives.

Do The Right Thing

There has been calls by the Monetary Authority of Singapore to banks to “do the right thing” after Mr. Tan Kin Lian called for the same earlier. What exactly is the right thing?

The right thing is not so clear cut depending on who you talk to.

Investors would want 100% money back (or close to it) on grounds of mis-representation or negligent mis-representation in being sold a product that is far riskier than even equities under the guise that it was similar to a fixed deposit.

The MAS would want banks to treat customers fairly and basically address their complaints without having to drag the regulator into the nitty gritty details.

The banks would want to incur as little losses as they can while doing damage control on their reputation and integrity to their brand name. They would also want to avoid MAS’s explicit or implicit sanctions with respect to regulatory requirements.

Where can all three interests coincide?

So far, I can see one concerned private citizen Mr Tan Kin Lian doing the most for the affected investors even though he has no duty to help them.

Perhaps, Mr Tan Kin Lian has “done the right thing”.

Be well and prosper.

Will MAS be able to do anything concrete other than to breathe down the banks who sold you the Lehman Minibonds and DBS High Notes 5 to “do something”?

Honestly, “caveat emptor” (let the buyer beware) comes up to mind.

In reality, unless you can prove negligent misrepresentation which is a tortious act but requires you to engage legal counsel to sue for damages arising from losses suffered from investing in such instruments, it’s pretty challenging to do so. One would have to incur legal costs and there is no guarantee that the courts would award damages.

It’s interesting to see that MAS consider a review of how such products are sold. Anecdotal evidence suggests that banks have been hardselling some of this stuff to investors. In general, when the credit event or market event doesn’t happen, investors don’t get hit hard and regulators just carry on. But when real losses mount due to the current credit market crisis in the global financial sector, something needs to be done or else public confidence will be shaken.

Personally, I’m not impressed by the methods used by the banks to sell products to retail investors who don’t know a treasury bill from a fixed deposit. It’s unfortunate that people have to suffer first before things get done.

Remember, in Singapore Inc, it’s caveat emptor.

Be well and prosper.

Under the current market turmoil, there are still some safe havens for your investment monies. Besides Singapore Treasury Bills, Singapore Government Bonds are also one way to invest in relatively safe assets. The MAS’s recent auction for its 5 year Singapore Government bonds yields 2.65% per annum which is higher than even the highest fixed deposits promotions by the banks. This is one area for consideration for those risk adverse investors. Definitely safer than Structured Products such as Lehman Minibonds or DBS High Notes 5 series.

Be well and prosper.