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Friday, 20 February 2009
Overseas Investment Deals Mired in Disputes
Chinese overseas investors who tallied huge losses in recent months have sued London-based Standard Chartered Bank (China) Ltd. in its position as the largest provider of Qualified Domestic Institutional Investor (QDII) investment products. pdf
A British bank and China’s QDII program, which gave Chinese investors access to overseas financial products, are under fire for big losses.
Fan Junli and Lu Yanzheng, Caijing 18 February 2009
Chinese overseas investors who tallied huge losses in recent months have sued London-based Standard Chartered Bank (China) Ltd. in its position as the largest provider of Qualified Domestic Institutional Investor (QDII) investment products.
Meanwhile, the China Banking Regulatory Commission (CBRC) has indicated authorities are reconsidering standards for access to QDII products, some of whose investors have watched their dream deals turn into nightmares.
Sources close to the regulator said banks sued by Chinese investors would face restrictions over disputed investment products.
Disgruntled investors claim Standard Chartered failed to sufficiently disclose investment risks tied to its products. They also charged bank salespeople misled investors, and that its investor complaint mechanism malfunctioned.
QDII investors were hard hit by last year’s Wall Street meltdown. Original investments declined for all 49 of Standard Charter’s current QDII products, with 32 losing more than 30 percent of principal and 10 products losing more than 50 percent.
Standard Chartered investors are not alone. A research institute affiliated with the Southwestern University of Finance and Economics in Chengdu showed that, as of December 19, investors lost principal on 63 types of QDII products tied to foreign banks, while 13 have lost 50 percent of their principal.
Unhappy Investors
CBRC called QDII investing an “overseas wealth management business” when it was unveiled in April 2006. Afterward, its investment scope quickly expanded, allowing Chinese companies and individuals to invest in foreign financial markets through commercial Chinese banks.
But the lawsuits have forced banks to reflect on problems with the design, sales and risk management of QDII products. Meanwhile, banking regulators and individual investors are taking a second look at financial innovations.
The list of legal cases connected to QDII investments has increased since a Shanghai resident filed a lawsuit on January 21 in a Pudong court against Standard Chartered. The court dismissed the suit, the bank was cited for irregularities in managing QDII products.
Caijing learned that a Suzhou investor surnamed Xiao sued the bank as well in a Suzhou court, and that the case was to be heard in February. Separately, six Standard Chartered clients were expected to file a class action case against the bank, and the Shanghai Banking Regulatory Commission contacted representatives of the six to hear their grievances.
According to complaints filed with courts and regulators, most problems were connected to QDII products jointly launched by the bank and U.S. financial services firm Merrill Lynch. They attracted US$ 150 million in investments for just two products.
The largest of the disputed investments involved 80 million yuan. And to press their case, about 50 Chinese and foreign investors have formed a “Coalition of Victims” through the Internet.
Charges and Defense
A bank official told Caijing sales of QDII products were made in three steps. First, an agreement was signed for entrusting the bank with a client’s overseas investments. A client then underwent an investment risk test, and finally a purchase form was signed.
The 12-question test was a vital part of the process. Only investors who passed the test could buy products with corresponding degrees of risk. But a few investors claimed the risk test did not conform to international standards.
Tianjin investor Zhang Naxin told Caijing she did not have the minimum asset of 1 million yuan required for a product during her first consulting session at Standard Chartered’s Tianjin Branch. But the bank’s risk assessment manager wrote that she was qualified for an investment of US$ 1 million, saying that amount was less than 5 percent of her total wealth.
It was often easy for banks and investors -- both seeking fast cash -- to reach deals quickly. A middle school teacher in Suzhou surnamed Wang, for example, failed a risk assessment when first attempting to buy QDII products. But later she said that “with guidance from a bank sales manager, I passed the test after altering my financial statement.”
Wang said she bought a second QDII product just outside her classroom from a bank salesman who interrupted her lessons. The teacher stopped class long enough to sign a 10,000 euro purchase order.
Investors also accused Standard Chartered of failing to reveal investment risks and other necessary information. One accuser is an investor in Chongqing who bought four QDII products worth a combined 1.02 million yuan last year. Monthly statements about his investments since February 2008 showed the principal intact. Then in September, he surprised to know that he lost 80 percent of the investment.
Standard Chartered has been reluctant to respond to the charges. But the British bank insisted all transactions were conducted according to terms and conditions reached between the bank and clients. “There is not a legal issue,” said a bank official. “It is impossible (for the bank) to compensate for losses suffered by clients.”
“There is not much the Standard Chartered Bank can do right now in a general situation like this,” another official told Caijing.
Who’s to Blame?
In a brochure, Merrill Lynch claimed its brainchild MLEIRIND Index could predict accurately whether a stock market would be bullish or bearish. Therefore, it said, clients could feel carefree about stock-linked investment products.
However, the index proved dysfunctional. When Hong Kong’s Hang Seng Index fell to its lowest level in three years on October 10, one investor said, the Merrill Lynch index recommended buying stock. Between October 30 and November 14, equity markets around the world were in a free fall, but the QDII product tied to MLEIRIND bought stocks twice and issued many buying orders.
Shanghai investor Xia Yan wrote the Shanghai Banking Regulatory Commission three times, accusing Standard Chartered of failing to disclose risks properly and misleading investors about products. He added the agreement between the bank and investors did not mention the failure of the Merrill Lynch index, which he charged was unfair to investors.
Responding to the accusation, Merrill Lynch and Standard Chartered said past models could not be used because the financial crisis was unprecedented. Neither fraud nor fabrications were involved, according to the institutions.
Merrill Lynch and Bank of America merged in December. And the person in charge of Merrill’s QDII product at Standard Chartered resigned at year-end, making it difficult to pin responsibility on anyone.
Standard Chartered has offered 68 types of QDII products since China launched the overseas investment program in 2006, leading all other foreign banks in the field.
Investor Red Flags
Experts think risk ignorance among investors, as well as commercial banks’ unfamiliarity with QDII products and poor regulatory supervision contributed to the crash.
Unlike investors in Europe and North America, a large number of Chinese individual investors put money into products linked to commodity prices, interest rates, stock indexes and currency exchange rates.
“China’s investors are different from mature investors in North America,” said Liu Tianbin, personal banking director at China Minsheng Banking Corp., who spent 10 years in the United States and said after coming home he was surprised by the popularity of QDII products in China.
Chinese investors “are not content with low returns,” Liu said. “Instead, they want principal-protected high profits.”
Sheldon Gao, CEO of British Schroders Group’s China market, questioned the sale of QDII products to unqualified clients.
“Why did banks sell products to those who did not meet minimum requirements for the purchase?” Gao asked. “Should banking regulators impose necessary restrictions on sales?”
Gao argued that investment marketers for banks should be trained like stock brokers and fund managers, as well as licensed so that the right products are sold to the right clients. However, Gao said, China’s commercial banks often handle business with investment products that’s more appropriate for investment banks.
As the financial crunch has shown, Liu said, commercial banks as well as individual investors often did not understand the risks associated with investment products, particularly products designed by investment banks and sold by commercial banks unable to control investment bank transactions, according to Liu.
Experts said commercial banks were ill-prepared for QDII products when they were introduced. And regulations softened. By the end of 2007, CBRC had abolished a case-by-case approval system and let commercial banks simply inform regulators about products. These moves were meant to ease restrictions on QDII, but the effort backfired.
By the second half 2008, CBRC was warning commercial banks repeatedly about QDII. “Banks incapable of handling QDII should stop doing such business,” regulators said.
CBRC determined banks that suffered big losses, or received a large number of investor complaints, were unable to handle QDII business.
During an internal meeting December 26, CBRC ordered province-level banking regulators to properly supervise risk disclosure issues. One official at the meeting said, “Many banks marketed investment products as deposits. This is a big problem.”
The official revealed that CBRC now plans to ask banks to market different products to different clients, depending on assets, vulnerability to risks and expected returns. The regulator is also requiring banks to review past practices.
“Many banks sold investment products to unfit investors irresponsibly,” the official said. “Banks should provide sufficient information of the risks associated with products.”
1 comment:
Overseas Investment Deals Mired in Disputes
A British bank and China’s QDII program, which gave Chinese investors access to overseas financial products, are under fire for big losses.
Fan Junli and Lu Yanzheng, Caijing
18 February 2009
Chinese overseas investors who tallied huge losses in recent months have sued London-based Standard Chartered Bank (China) Ltd. in its position as the largest provider of Qualified Domestic Institutional Investor (QDII) investment products.
Meanwhile, the China Banking Regulatory Commission (CBRC) has indicated authorities are reconsidering standards for access to QDII products, some of whose investors have watched their dream deals turn into nightmares.
Sources close to the regulator said banks sued by Chinese investors would face restrictions over disputed investment products.
Disgruntled investors claim Standard Chartered failed to sufficiently disclose investment risks tied to its products. They also charged bank salespeople misled investors, and that its investor complaint mechanism malfunctioned.
QDII investors were hard hit by last year’s Wall Street meltdown. Original investments declined for all 49 of Standard Charter’s current QDII products, with 32 losing more than 30 percent of principal and 10 products losing more than 50 percent.
Standard Chartered investors are not alone. A research institute affiliated with the Southwestern University of Finance and Economics in Chengdu showed that, as of December 19, investors lost principal on 63 types of QDII products tied to foreign banks, while 13 have lost 50 percent of their principal.
Unhappy Investors
CBRC called QDII investing an “overseas wealth management business” when it was unveiled in April 2006. Afterward, its investment scope quickly expanded, allowing Chinese companies and individuals to invest in foreign financial markets through commercial Chinese banks.
But the lawsuits have forced banks to reflect on problems with the design, sales and risk management of QDII products. Meanwhile, banking regulators and individual investors are taking a second look at financial innovations.
The list of legal cases connected to QDII investments has increased since a Shanghai resident filed a lawsuit on January 21 in a Pudong court against Standard Chartered. The court dismissed the suit, the bank was cited for irregularities in managing QDII products.
Caijing learned that a Suzhou investor surnamed Xiao sued the bank as well in a Suzhou court, and that the case was to be heard in February. Separately, six Standard Chartered clients were expected to file a class action case against the bank, and the Shanghai Banking Regulatory Commission contacted representatives of the six to hear their grievances.
According to complaints filed with courts and regulators, most problems were connected to QDII products jointly launched by the bank and U.S. financial services firm Merrill Lynch. They attracted US$ 150 million in investments for just two products.
The largest of the disputed investments involved 80 million yuan. And to press their case, about 50 Chinese and foreign investors have formed a “Coalition of Victims” through the Internet.
Charges and Defense
A bank official told Caijing sales of QDII products were made in three steps. First, an agreement was signed for entrusting the bank with a client’s overseas investments. A client then underwent an investment risk test, and finally a purchase form was signed.
The 12-question test was a vital part of the process. Only investors who passed the test could buy products with corresponding degrees of risk. But a few investors claimed the risk test did not conform to international standards.
Tianjin investor Zhang Naxin told Caijing she did not have the minimum asset of 1 million yuan required for a product during her first consulting session at Standard Chartered’s Tianjin Branch. But the bank’s risk assessment manager wrote that she was qualified for an investment of US$ 1 million, saying that amount was less than 5 percent of her total wealth.
It was often easy for banks and investors -- both seeking fast cash -- to reach deals quickly. A middle school teacher in Suzhou surnamed Wang, for example, failed a risk assessment when first attempting to buy QDII products. But later she said that “with guidance from a bank sales manager, I passed the test after altering my financial statement.”
Wang said she bought a second QDII product just outside her classroom from a bank salesman who interrupted her lessons. The teacher stopped class long enough to sign a 10,000 euro purchase order.
Investors also accused Standard Chartered of failing to reveal investment risks and other necessary information. One accuser is an investor in Chongqing who bought four QDII products worth a combined 1.02 million yuan last year. Monthly statements about his investments since February 2008 showed the principal intact. Then in September, he surprised to know that he lost 80 percent of the investment.
Standard Chartered has been reluctant to respond to the charges. But the British bank insisted all transactions were conducted according to terms and conditions reached between the bank and clients. “There is not a legal issue,” said a bank official. “It is impossible (for the bank) to compensate for losses suffered by clients.”
“There is not much the Standard Chartered Bank can do right now in a general situation like this,” another official told Caijing.
Who’s to Blame?
In a brochure, Merrill Lynch claimed its brainchild MLEIRIND Index could predict accurately whether a stock market would be bullish or bearish. Therefore, it said, clients could feel carefree about stock-linked investment products.
However, the index proved dysfunctional. When Hong Kong’s Hang Seng Index fell to its lowest level in three years on October 10, one investor said, the Merrill Lynch index recommended buying stock. Between October 30 and November 14, equity markets around the world were in a free fall, but the QDII product tied to MLEIRIND bought stocks twice and issued many buying orders.
Shanghai investor Xia Yan wrote the Shanghai Banking Regulatory Commission three times, accusing Standard Chartered of failing to disclose risks properly and misleading investors about products. He added the agreement between the bank and investors did not mention the failure of the Merrill Lynch index, which he charged was unfair to investors.
Responding to the accusation, Merrill Lynch and Standard Chartered said past models could not be used because the financial crisis was unprecedented. Neither fraud nor fabrications were involved, according to the institutions.
Merrill Lynch and Bank of America merged in December. And the person in charge of Merrill’s QDII product at Standard Chartered resigned at year-end, making it difficult to pin responsibility on anyone.
Standard Chartered has offered 68 types of QDII products since China launched the overseas investment program in 2006, leading all other foreign banks in the field.
Investor Red Flags
Experts think risk ignorance among investors, as well as commercial banks’ unfamiliarity with QDII products and poor regulatory supervision contributed to the crash.
Unlike investors in Europe and North America, a large number of Chinese individual investors put money into products linked to commodity prices, interest rates, stock indexes and currency exchange rates.
“China’s investors are different from mature investors in North America,” said Liu Tianbin, personal banking director at China Minsheng Banking Corp., who spent 10 years in the United States and said after coming home he was surprised by the popularity of QDII products in China.
Chinese investors “are not content with low returns,” Liu said. “Instead, they want principal-protected high profits.”
Sheldon Gao, CEO of British Schroders Group’s China market, questioned the sale of QDII products to unqualified clients.
“Why did banks sell products to those who did not meet minimum requirements for the purchase?” Gao asked. “Should banking regulators impose necessary restrictions on sales?”
Gao argued that investment marketers for banks should be trained like stock brokers and fund managers, as well as licensed so that the right products are sold to the right clients. However, Gao said, China’s commercial banks often handle business with investment products that’s more appropriate for investment banks.
As the financial crunch has shown, Liu said, commercial banks as well as individual investors often did not understand the risks associated with investment products, particularly products designed by investment banks and sold by commercial banks unable to control investment bank transactions, according to Liu.
Experts said commercial banks were ill-prepared for QDII products when they were introduced. And regulations softened. By the end of 2007, CBRC had abolished a case-by-case approval system and let commercial banks simply inform regulators about products. These moves were meant to ease restrictions on QDII, but the effort backfired.
By the second half 2008, CBRC was warning commercial banks repeatedly about QDII. “Banks incapable of handling QDII should stop doing such business,” regulators said.
CBRC determined banks that suffered big losses, or received a large number of investor complaints, were unable to handle QDII business.
During an internal meeting December 26, CBRC ordered province-level banking regulators to properly supervise risk disclosure issues. One official at the meeting said, “Many banks marketed investment products as deposits. This is a big problem.”
The official revealed that CBRC now plans to ask banks to market different products to different clients, depending on assets, vulnerability to risks and expected returns. The regulator is also requiring banks to review past practices.
“Many banks sold investment products to unfit investors irresponsibly,” the official said. “Banks should provide sufficient information of the risks associated with products.”
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