Hong Kong’s hard-nosed financial regulators are adding a new weapon to their arsenal in the battle to protect investors from unscrupulous stockbrokers: old ladies and pregnant women. The Securities and Futures Commission (SFC) and de-facto central bank, the Hong Kong Monetary Authority, plan to hire actors — including retirees and pregnant women — to make sure banks and brokerages use above-board techniques when selling investment products.
The controversial move has Hong Kong’s financial community up in arms, claiming the so-called “mystery shopper” program will entrap good and bad financial advisers alike — and ruin their careers.
“It’s a mess — this kind of entrapment will hurt a lot of honest, hard working people,” said Glenn Turner, chairman of Hong Kong’s Independent Financial Advisers Association.
PHOTO: AFP
“You may have nine good but inexperienced advisers for every one bad one, but they’ll all get dumped into the same basket. It doesn’t help the industry move forward to hurt nine people to get one,” Turner said.
The move comes two years after a “mis-selling” scandal rocked the city of seven million following the collapse of Wall Street brokerage Lehman Brothers.
More than 40,000 Hong Kong investors, including many retirees, bought about US$2 billion worth of complex financial products backed by Lehman Brothers, including so-called minibonds. Most saw their investment dissolve when Lehman went bust in 2008 as it buckled under the weight of the collapse in US sub-prime, or high-risk, mortgages.
Many Lehman investors claimed they had been misled about the risks involved, sparking angry protests against banks, the government and even financial regulators whom they accused of failing to prevent the scandal.
Last year, 16 banks in Hong Kong agreed to partially refund some of the investors in a deal that could cost them up to HK$6.3 billion (US$810 million) — almost 25,000 investors have so far accepted settlements worth a combined HK$5.2 billion.
The Lehman scandal also prompted the SFC to announce proposals aimed at tightening rules on the sale of investment products.
Among them, banks and brokerages would have to give investors a five-day grace period if they had second thoughts about the deal.
In March, Hong Kong police said they arrested two female bank employees suspected of “mis-selling” Lehman-linked products.
Hong Kong legislator Kam Nai-wai (甘乃威) described the mystery shopper program as “very much needed.”
“The Lehman minibonds fiasco showed there are many ‘mis-selling’ practices,” Kam told the daily South China Morning Post.
“In fact, I think this scheme should go beyond investment products to other consumer and lending products to make sure retailers and bankers are treating their clients appropriately,” Kam said.
The program would help regulators better assess how certain investments are sold and pin-point red flags, the SFC said, noting that securities watchdogs in other jurisdictions have used mystery shopper programs.
“It’s not something new or groundbreaking,” an SFC spokesman said.
The regulators’ plan could keep the industry on its toes, a South China Morning Post columnist wrote this week.
“It’s a legitimate technique for monitoring the industry. It’s another matter if the SFC then proceeds to use the testimony of these ‘mystery shoppers’ to slap big fines on people or send them to jail through our courts of conviction,” the column said.
“Inciting people to commit a crime is in itself a crime. I think the SFC understands this or, at least, I hope it does,” the column added.
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