Hong Kong Tightens Regulation Of Derivatives Sales

MIN LEE

HONG KONG (AP) — Hong Kong officials said Monday they have tightened regulation of complicated investment products 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, K.C. Chan, Secretary for Financial Services and the Treasury, said at a legislative hearing Monday. The government was 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 $1.8 billion in Lehman-linked derivatives were left in limbo after the U.S. investment bank collapsed September last year. Upset they weren't fully aware of the risk their investments carried — many of the complex derivatives were innocuously labeled "mini-bonds" — investors took to the streets. Hong Kong regulators announced a settlement with 16 local banks in July that returned up to 70 percent of principal to the buyers, or up to $6.3 billion Hong Kong dollars ($813 million).