Hong Kong's International Financial Centre: Retrospect and Prospect

legal obligations on intermediaries selling such services. The surrounding events also suggest a
new understanding that such obligations rest not simply on the shoulders of private
intermediaries but also on government. In short, it repudiates traditional notions of caveat
emptor. Together with the evolution of such practices as mandatory insurance coverage for bank
deposits, governments in Hong Kong will in the future likely find it more difficult not to respond
to social demands for protection from sudden or widespread financial losses, even when such
losses do not threaten overall market stability. Again, to some observers and participants who
valued the freedom they once found in Hong Kong, this is a matter of some regret. For present
purposes, the main point is that Hong Kong has joined most other advanced economies in this
regard.
Lehman mini-bonds and similar instruments were sold in many countries, but their
unwinding cast a particularly harsh light on the limits of Hong Kong’s rules governing the
selling of financial products to retail investors. The same lesson had been learned elsewhere
during earlier crises. Transparency, or full disclosure, in the selling especially of complex
products by banks is not enough. Light-touch regulation to discourage mis-selling by institutions
the public typically sees as insured or at least closely watched by government is not enough.
Traditional understandings of the fiduciary obligations of banks to their customers are now
reinforced with the threat of penalties or enforcement efforts designed to elicit ‘voluntary’
compensation. In a new era of structured financial products with tempting returns and vague
risks, especially to investors hardly qualified as ‘professionals,’ the idea of ‘self-regulation’ rang
hollow.
The fact that Lehman Brothers itself was ultimately at risk in the event of a default on the
mini-bonds sold by Hong Kong institutions with permission of the SFC was not entirely clear at
the point of sale. Even if it had been, investors may well have imagined that the Lehman name
was undoubted. The truth is that no one expected the firm to be permitted to go into bankruptcy
in 2008, and even if they had, certainly no one should have expected its American overseers to
be so cavalier in their consideration of liabilities not domiciled in the United States. When that
bankruptcy nevertheless did occur, contagion spread across borders like wildfire in a dry forest.
Under British law, for example the London subsidiary of Lehman ceased business immediately.
The holders of Lehman Brothers mini-bonds in Hong Kong suddenly found themselves facing
staggering losses. Having authorized their sale, under the Securities and Futures Ordinance and
the Companies Ordinance, the SFC in turn found itself the target of intense political reaction. As
the main regulator and supervisor of banks selling the Lehman instruments, the HKMA was
drawn into the ensuing controversy as well.
In short, some 44,000 investors bought nearly HK$16 billion in mini-bonds guaranteed by
Lehman Brothers. They might well have turned out to be low-risk, high-yield investments. With
the unexpected collapse of the firm, however, they in fact turned into under-valued claims at the
tail-end of a long and complicated unwinding process. With the HKMA and SFC awash in
complaints from the holders of those claims, and the government under mounting pressure from
the LegCo, the sixteen banks that had distributed the mini-bonds eventually agreed to repurchase
them. They ‘voluntarily’ bought most of them back at prices varying between 60 and 70% of
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