HONG KONG: Most investors in the so-called Lehman Brothers minibonds have accepted an offer by banks to buy back the soured investment at a discount, Financial Secretary John Tsang told the Legislative Council in first-time testimony on the minibond saga on Friday.

As of November, 24,649 qualified investors replied to banks on the repurchase offer, of which 98.9 percent agreed to a settlement, the city's financial chief said.

This came after regulators quickly conducted investigations when the saga surfaced and ultimately struck an agreement with banks that had distributed the structured financial product to investors, he said.

"This is handy evidence that regulatory bodies are competent," he said, in defense of the government's regulatory competency. The value of minibonds has fallen sharply, with some reduced to zero, after Lehman Brothers collapsed in September last year, causing huge losses to investors.

Holders of the notes, many of whom are elderly or poorly educated, have been fiercely lobbying regulators to pressure banks into buying back the notes at 100 percent of their face value, claiming that banks are guilty of misconduct in selling the risky product to unwitting investors.

However, under an agreement struck by the Securities and Futures Commission and the Hong Kong Monetary Authority with 16 banks in July, banks offered only to repurchase the notes at 60 percent of the nominal value from investors aged below 65 and at 70 percent of the nominal value from investors aged 65 or above.

The buyback program, the largest compensation scheme in the history of the city, will cost banks about HK$6.3 billion, according to estimate by regulators earlier.

"This large-scale settlement arrangement (has been executed) with the interests of investors at the core. It will spare investors tedious and complicated legal procedures," Tsang told legislators on Friday.

Regarding criticism by some legislators about the government's failure to forewarn investors against the investment risk, the Financial Secretary said the global financial tsunami and the demise of Lehman took everybody by surprise and that "no regulatory system existed without some loophole".

However, he promised that the government would keep on reviewing the regulatory system, with a short-term objective of improving banks' sales procedures for financial products, and a long-term target of establishing a bureau for investor education and setting up a mechanism for dispute settlement.

Tsang also said the Hong Kong Monetary Authority was expected to finish its investigation on most cases involving complaints against financial products linked to Lehman.

(HK Edition 12/12/2009 page5)