Question of liability as the big blame game goes on
Disputes between financial institutions and their customers are hardly a rare occurrence. But legal disputes lodged against banks soared in the wake of the financial crisis, when tens of thousands of individuals in Asia saw investments turn sour.
For more than two years, in Hong Kong and Singapore, holders of defaulted Lehman Brothersminibonds staged daily protests outside bank branches, displaying banners, clanging cymbals and playing recordings denouncing the organisations that sold them their investments.
Hong Kong investors filed hundreds of civil and legal claims involving billions of dollars.
According to industry figures, about 43,000 investors in Hong Kong ploughed more than HK$15 billion into minibonds or credit default swap baskets and other complex products issued by Lehman, before the United States-based investment bank collapsed.
Despite an agreement being reached between regulators and minibond distributors to repay a large part of the principal of the defaulted instruments, the protests continue. Under the offer, investors would recover 85 to 96.5 per cent of their initial investment, up from 60 to 70 per cent in an earlier agreement.
In a statement on its website, receivers PricewaterhouseCoopers said the deal must first be approved by at least 75 per cent of complainants at meetings expected to be held next month.
Cases outstanding are believed to involve legal arguments about whether those that lost money qualified as professional investors and therefore should have understood the risks involved when they were sold minibonds.
Meanwhile, at the time of the crisis, the media was awash with reports of how mentally ill and the elderly clients, including one woman who was 90, were sold minibonds and structured products unsuited to their risk profile.
"Not all the claimants are quite as naive as they pretend they are. They have lost money through making a bad judgment call and are now looking for ways to recoup their losses using the sympathy of the public and pressure from the government on banks to bring the issue to a conclusion," says a lawyer involved with minibond litigation.
Professional, experienced and corporate investors are not eligible for the settlement. Under Securities and Futures Commission guidelines, professional investors are individuals and corporations that indicate they have access to sufficient assets and the experience to qualify as sophisticated investors.
Within the finance industry, some consider having HK$8 million in liquid assets to be the main qualification to becoming a professional investor. A Fidelity International survey showed 94 per cent of Hong Kong respondents thought they should be responsible for their investment decisions. But their behaviour and expectations are not aligned.
"Seventy eight per cent said they thought 'investor protection' was to provide investors with the appropriate information before making an investment decision, yet only 41 per cent would read the prospectus and 36 per cent would read fact sheets or a product brochure," said Kerry Ching, a managing director at Fidelity.
Singapore minibond protestors have been urging the authorities to follow Hong Kong's example and persuade banks to give them what they believe is fair compensation.
Not everyone feels that way. Senior minister Lee Kuan Yew has reprimanded investors, saying they "went in with their eyes open", and therefore have no right to blame the financial industry for their losses.
The Field versus Barber Asia decision was the first time in Hong Kong a financial adviser was held liable for giving negligent advice.
Field, who was considered an inexperienced investor, lost several million dollars when she was advised to change her low-risk strategy into a high risk scheme unsuited to her stated objectives.
Ian De Witt, a lawyer who successfully represented Susan Field in her litigation involving Barber Asia, said financial advisers should be held accountable for the advice they gave.
However, he said the experience or lack of investment experience a client may have could have a bearing when it came to liability if the investment went wrong.
In his 92-page judgment, Justice Aarif Barma said "a duty of care" existed in the financial adviser's relationship with clients.
Rainbow Pan, chief executive at ipac financial planning Hong Kong, said: "People always expect to receive a high return on their investments, which is a key reason we carry out rigorous investor suitability checks."
To help investors avoid making irrational investments, Pan said ipac conducted client stress-tests that focused on investment strategies and performance scenarios.
"If the client is not comfortable with the risks, we rebalance the plan until we find a strategy that meets their risk tolerance level," Pan said. "Our clients can sleep easy at night."
