Bloomberg News

Hong Kong Regulator Warns Banks on Complex Product Disclosure

January 06, 2012

Jan. 6 (Bloomberg) -- The Hong Kong Monetary Authority urged banks in the city to ensure that customers understand the risks of buying complex products such as subordinated bonds, in the regulator’s latest effort to strengthen disclosure.

The city’s de facto central bank said in a letter to financial institutions yesterday that they should explain to clients that so-called junior securities “bear higher risks” than senior debt. Subordinated debt doesn’t pay out in the case of a default until after senior debt holders are paid in full.

“Disclosure and representation relating to credit information should be clear and not misleading,” the authority said. The circular said banks should refer customers to documents detailing risks of other investments, particularly exchange-traded funds.

The warning comes after the Securities and Futures Commission, the investor protection watchdog, authorized six so- called synthetic ETFs from Deutsche Bank AG. on Dec. 30. That was the first time in 18 months the SFC has given permission for such products, which mimic the behavior of exchange-traded funds through the use of derivatives.

The approval comes more than three years after the bankruptcy of Lehman Brothers Holdings Inc. Following that insolvency, financial institutions in the city faced criticism for selling investment products containing derivatives to individual investors.

A HKMA spokesman, who cited the regulator’s policy in declining to be identified, said in e-mailed comments today that the letter was part of regular efforts to ensure adequate protection for investors. It wasn’t triggered by the SFC’s recent authorization of synthetic ETFs, the person said.

The HKMA is responsible for the stability of the city’s banking system. It has no statutory responsibility to protect consumers, a role the SFC assumes.

--Editors: Andrew Monahan, Katrina Nicholas

To contact the reporter on this story: Benjamin Garvey in Hong Kong at

To contact the editor responsible for this story: Shelley Smith at

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