IS IT ALL ABOUT DISCLOSURE? REGULATING STRUCTURED FINANCIAL PRODUCTS AFTER THE LEHMAN BROTHERS MINIBONDS SAGA

Abstract

The shockwaves from Lehman Brothers’ demise in September 2008 are still reverberating through the world of retail structured financial products in Asia. The retail buyers across the region, in particular, those in Hong Kong and Singapore suffered losses from complex structured financial products linked to the failed US investment banks. Although the backlash against distributors of Lehman minibonds and other structured products has lost much of its initial fury thanks in part to a Hong Kong government-brokered settlement, the regulators need to propose or adopt more effective regulatory tools except having clamped down on the sales practices of distributors and attempted to build up an arbitration platform for financial disputes. In conjunction with the distributors’ efforts to simplify the structured products in the market, policy makers and market watchdogs may employ at least some “mini” regulatory techniques to deal with the complex structured products. The effective regulatory technique is to strengthen the disclosure regime providing sufficient information regarding the risks involved in structured securities to the end customers. Improving corporate governance, i.e., placing more emphasis on the “gatekeepers” such as attorneys, underwriters, analysts and rating firms, is another regulatory technique the regulators may adopt and implement in the future. This article scrutinizes problems pertaining to complex financial instruments, in particular, Lehman Brothers’ minibonds from legal perspectives, i.e., the principal characteristics of the minibond products, the subsequent regulatory investigations into whether misspelling occurred, the issues that financial institutions should take into account when reviewing their selling practices, the supervisory regime under which the sales of structured financial products can be improved, the direction the judiciary may move forward in order to form a more moral market for the use, the problems that related to professional intermediaries and possible regulatory instruments to improve the governance of such intermediaries.