Compliance vs Ethics

SFC has recently banned several licensed representatives of broker firms for life from re-entering into the industry. Such disciplinary actions typically reflected serious misconducts regarding integrity.

In one case, the licensed representative had used client accounts and related accounts to conduct her personal securities trading in securities. To settle the unauthorised trades, she sold clients’ stock holdings without the clients’ instructions and misappropriated cheques issued by her employer and its clients. She concealed the unauthorised trading and misappropriation of client assets by falsifying statements of accounts and lied to the clients that statements of accounts were only issued semi-annually for environmental reasons.

In another case, the licensed representative had manipulated the share price of a listed company. He lied to the SFC investigators by blaming his clients for the manipulation, and by asking those clients to lie about this to his employer and to SFC. He told one of those clients that SFC would not take any action against her but it would revoke his licence, in order to coax her into assuming the responsibility for the manipulative orders. As a result, he was prosecuted for market manipulation and his clients were prosecuted for misleading SFC.

Compliance and ethics are a bit different. Non-compliance means you fail to follow the rules of the game, which may or may not be a moral problem. But the subjects in the above cases are obviously unethical and deserve the "ban for life" penalty.

The role of compliance officers is to ensure compliance with regulations but not to maintain ethical standards of adults. I don't believe in any compliance training which can transform a devil into an angel.

(I will be out of town from 27 to 30 Nov. Will blog again on 1 Dec.)

Dealing vs Advising

"Dealing" and "advising" are two terms in SFO which are often confusing people. If we simply rely on the common sense, then of course dealing means you enter into an agreement to buy and sell investment products for your client, and advising means you recommend your client to make an investment decision.

However, under Schedule 5 of SFO, dealing also means you "induce or attempt to induce" the client to enter into the agreement. That means, dealing covers the conduct of solicitation (selling).

Should all salespersons of securities be licensed for Type 1? Lawyers may say yes by their legal interpretation. But the fact is that there are many financial planning firms licensed only for Type 4 but selling unit trusts.

It seems that SFC has a different criterion to differentiate dealing and advising. My understanding is that if a financial planning firm does not receive client money when selling unit trusts (i.e. only pass the client's payment cheque to the fund house rather than depositing the client money into its account), then Type 1 licence is not required. It can earn the commission rebate for selling unit trusts by holding only a Type 4 licence.

Such distinction makes sense because the operational risk of keeping client money is much higher and Type 1 is subject to a more stringent FRR requirements. In contrast, banks must be licensed for Type 1 when selling unit trusts because they would receive client money by debiting their bank accounts.

(Disclaimer: The above view does not constitute any legal opinion. Please seek your legal advice in case of doubt.)

[Remark in 2008: Subsequently I've found that the above view for differentiating Type 1 and Type 4 is not taken by SFC. SFC now considers that even IFA firms should be licensed for Type 1 because they are actually distributing unit trusts in return for commission rebates from fund houses (rather than advisory fees from clients).]

Risk of Product Mis-selling

Last year SFC published a report regarding a theme inspection on certain investment advisers (IA), which revealed a number of deficiencies of the selling practices. It is now conducting the second round inspection.

In her speech yesterday, SFC's Alexa Lam mentioned the following extreme cases of mis-selling:

• A teacher was advised to invest in an unauthorized fund with gearing and promised a potential return of 16%. He lost all his savings.
• A woman aged 86 had most of her savings switched into high-risk single country funds by bank staff. SFC passed the cass to HKMA.
• A distributor produced misleading marketing materials stating that the unauthorized fund (described as speculative investment in the offering document) was suitable for conservative investors.
• A retiree aged 63 was advised to purchase an ILAS that required an annual payment for 3 years and then he had to wait 9 years before receiving a stable monthly return over the next 25 years.
• A retiree aged 65 was advised to take out an insurance savings plan for his grandson that will run for the next 16 years.

Even though the above obvious cases represent only a small minority of total sales, they should alert us that the average quality of IA in HK has concerned SFC.

Under S.168 of SFO, SFC is empowered to make the rules for the intermediary to:

• prohibit the use of misleading or deceptive advertisements;
• require specified terms and conditions to be included in client
  contracts;
• require provision to the client specified information concerning the business of the intermediary, and the identity and status of any person acting on behalf of the intermediary;
• require ascertainment of each client's identity and his financial situation, investment experience and investment objectives;
• require disclosure of any interest in the financial product recommended to the client;
• require risk disclosure is made to the client;
• require disclosure of commission or advantage received from any third party is made to the client.

As these rules, if made by SFC, represent statutory requirements, they should have a greater deterrent effect on mis-selling. However, if SFC favors the principles-based regulatory approach adopted by FSA, it would rather issue more industry guidance notes and initiate more disciplinary actions again those irresponsible IA.

Professional Investor (2/2)

In US, those investors provided with less protection are called "accredited investors". In HK, the term "professional investor" is used, which is quite misleading. It is reasonable to consider Category-A PI as more sophisticated and "professional" in terms of investment decision-making. But how about Category-B PI?

If you claim yourself to be a professional accountant, I would expect you are quite knowledgable in the accounting discipline or even have obtained a relevant qualification. If a customer is named as a Category-B PI, should I expect he is (say) a CFA or at least an investment expert? Of course not! They are PI just because they are wealthy. If they are investment experts, how come you can act as their investment advisers?

When you sell those complicated products (e.g. hedge funds) to a "rich dad", you believe you don't need to ensure suitability because they are Category-B PI. However, when they sue you for mis-advising and demonstrate to the judge that they are ignorant of investing, don't you think you can escape all liability?

Somebody argued that an ignorant PI can protect himself by appointing a professional to advise him. This is a circular argument. If you are the professional adviser, how could you advise your client to prevent from being cheated by you!?

In conclusion, my recommendations to SFC are:

• Rename "professional investor"; and
• Remove the Code of Conduct waivers available to Category-B PI.

Professional Investor (1/2)

"Professional investor" (PI) is a special term created by SFO, which refers to those investors who are considered as more sophisticated and thus requiring less protection. In other words, when an intermediary is dealing with PI, it is subject to less regulatory requirements.

PI is classified into two categories. Category-A PI includes those "institutional investors" such as banks, brokers, government bodies, etc. They are identified as PI by their status. Category-B PI includes trustees, individuals, corporations, etc. They are defined as PI by means of their financial position. Typically most of an intermediary's PI customers are of Category-B.

What are regulatory exemptions available for PI? I prefer classifying them into two types:

• Offering exemptions - e.g. offer of unauthorized products (SFO S103), no restrictions of cold calling (S174) and offer of securities without written document (S175)
• Operational exemptions - e.g. no need to send contract notes & account statements, no client agreement, no suitability assessment, etc.

Offering exemptions are equally applied to both categories of PI. Intermediaries like to use these exemptions as they can generate more sales opportunities. For operational exemptions, there are different treatements between two categories. Relatively speaking, Category-B is more protected than Category-A PI, e.g. written consent is required if operational exemptions are applied to Category-B PI.

There are often people asking me whether an "investment experience assessment" (e.g. 40 transactions per year) has to be done before treating a customer as a PI. My answers: first, such assessment is only required if you want to apply the operational exemptions in Conduct of Conduct to Category-B; second, such an assessment is only done once (i.e. no need for annual review).

Is exemptions for PI really a blessing to investment business? I would say yes or no. While offering exemptions are really beneficial, operational exemptions are often setting a trap for business people! I'll continue in tomorrow's blog.

Private Equity (2/2)

In the discussion paper, FSA seeks to address this question: "What's the appropriate level and form of regulatory engagement with the private equity sector"? Too much regulation could be detrimental to capital market efficiency but too little regulation could damage market confidence. The paper sets out an initial risk analysis based on historical industry views and recent regulatory assessments.

Key risks identified by FSA are summarized below:

• Excessive leverage - If lending on private equity transactions is not prudent, the default risk may substantially affect the financial stability.
• Unclear ownership of economic risk - The risk transfer practices (e.g. use of credit derivatives) may create operational problems in credit events.
• Reduction in overall capital market efficiency - The quality, size and depth of the public markets may be damaged by the expansion of the private equity market.
• Market abuse - The significant flow of price sensitive information in relation to private equity transactions may create a high potential of market abuse.
• Conflicts of interest - Material conflicts arise in private equity fund management between the fund manager and the investors.
• Market access constraints - Private equity funds lack liquidity as they are not available to retail investors by listing.
• Market opacity - Performance assessment of private equity is less transparent.

UK FSA is reviewing the regulatory framework governing private equity, but HK SFC remains silent. Under HK's regime, private equity transactions are not considered as "dealing in securities" as the shares are not transferable. While private equity funds are securities, it is unlikely SFC would authorize them for public marketing. So currently private equity funds are only sold to professional investors. Perhaps in forseeable future SFC may set up a new regulatory regime for private equity funds, just like what it did previously for hedge funds.

Private Equity (1/2)

Other than hedge fund, another innovative financial instrument drawing the attention of global regulators is private equity.

According to an article in Wikipedia, "private equity" is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on the public market. Passive institutional investors may invest in private equity funds, which are in turn used by private equity firms for investment in target companies. Categories of private equity investment include leveraged buyout, venture capital, growth capital, angel investing, mezzanine capital and others. Private equity funds typically control management of the companies in which they invest, and often bring in new management teams that focus on making the company more valuable.

The salient features of private equity include longer investment horizon and lack of liquidity (as there are many transfer restrictions on private securities). Private equity firms generally receive a return on their investment through one of three ways: (a) IPO; (b) sale or merger of the company they control; or(c) recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund which pools contributions from smaller investors.

Private equity funds are generally organized as limited partnerships which are controlled by the private equity firm that acts as the general partner. The fund obtains capital commitments from certain qualified investors such as pension funds, financial institutions and wealthy individuals to invest a specified amount. These investors become passive limited partners in the fund partnership and at such time as the general partner identifies an appropriate investment opportunity, it is entitled to "call" the required equity capital at which time each limited partner funds a pro rata portion of its commitment. All investment decisions are made by the general partner, who is typically compensated with a management fee (as a percentage of the fund's total equity capital) as well as a performance fee (based on the profits generated by the fund).

Most private equity funds can only be offered to institutional investors and individiuals of substantial net worth as they are generally less regulated than ordinary mutual funds. Given the significant growth in capital flowing into private equity funds, FSA has recently issued a comprehensive discussion paper about the regulatory framework of private equity. I will blog it tomorrow.

Senior Management Buy-in

Compliance officers should be empowered by senior management in order to perform their duties effectively. But it doesn't mean the role of senior management is simply to delegate. They have been expected to roll up their sleeves, especially under the principles-based regulatory framework.

In the recent FSA conference titled "Treating Customers Fairly, Towards Fair Outcomes for consumers", 33% of delegates responded that the biggest barrier to implementing Treating Customers Fairly within their firms was lack of buy-in from senior management. Other major barriers are quality of staff (23%), regulation (11%) and cost (10%).

The above findings, together with recent FSA enforcement cases, reinforce the point that senior management aspirations had not yet fully permeated through businesses to result in improved outcomes for customers.

The Treating Customers Fairly (TCF) initiative is a pioneering example of the FSA's move towards more principles-based regulation, which focuses on the outcomes to be achieved as well as the responsibility of senior management to achieve them.

The six outcomes for consumers set out by FSA include:

• Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;
• Products and services marketed and sold in the retail market are designed to meet the needs of identified groups of consumers and are targeted accordingly;
• Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
• Where consumers receive advice, the advice is suitable and takes account of their circumstances;
• Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and also as they have been led to expect; and
• Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Real changes of compliance culture are required to achieve the above outcomes, which are emerging from senior management commitment. Increasingly FSA is seeing senior management engaging directly with the experience of their customers, e.g. listening to calls from call centres, sampling complaints, looking at reports from mystery shoppers, participating in customer panels, etc.

Such efforts can ensure that senior management can obtain more information to measure the compliance performance, without being biased by the word-of-month reports from either the business unit or the compliance department.

Cyber Crime

The hottest news about IT security in recent days is probably the online brokerage frauds happened at E*Trade and TD Ameritrade. Customer accounts of these 2 top online brokers had been hacked in Eastern Europe and Asia. US SEC found that the thieves used the customer money in a "pump-and-dump" scheme by pushing up the prices of thin-traded stocks and then sold them for a profit.

E*Trade disclosed that it had spent US$18m to compensate customers suffered from the unauthorized trades, while TD Ameritrade did not disclose the compensation amount.

The above online fraud doesn't result in misappropriation of customer money, but customers would be subject to a high legal risk if their accounts are compromised by unauthorized illegal trading or even money laundering.

Another type of pump-and-dump scams recently highlighted again by NASD involves the recommendation of a company's stock through false and misleading statements (the pump) in an email. Misled investors then buy the stock, creating demand that often causes the stock's price to soar. Eventually the fraudsters sell off their shares at the artificially inflated price (the dump), leaving the investors they duped with a worthless stock.

In HK, unauthorized transactions via computer hacking is less widespread. Usually they are manually arranged by "internal thieves" (i.e. staff working within the brokerage firm). Under the S&F (Insurance) Rules, the risk arising out of loss of client assets is covered. However, there is no protection against the legal risk arising from misuse or abuse of client account information!

Customer Account Statements

Following numerous incidents of unauthorized transactions, SFC has reminded again and again investors to check against their account statements to detect and report any discrepancies on a timely basis. Typically in the account statements a reminder is made that if no discrepancy is reported within a period of time (e.g. 30 days), the transactions are assumed to be accurate. If there is unreported false accounting, investors would face a risk when claiming compensation upon broker liquidation.

In US, recently SEC approved amendments to the NASD Rule 2340 requiring account statements to include a statement reminding customers to report inaccuracies in their accounts in writing. That means, even the customers have verbally confirmed any discrepancy with the broker, they should re-confirm the matter by writing to the broker and keep a copy. This gives the customers a better protection in terms of investor compensation.

Rule 2340 does not impose any time limit during which customers may report inaccurancies in their accounts. This is better than the HK practice in general. NASD also reminds its members to include in each account statement the name and telephone number of a responsible individual whom the customers can contact. Obviously such individual should be an independent person (e.g. back office staff) rather than the account executive, otherwise the problem may be withheld.

Business people often complain that account statements consume too much paper because more and more compliance messages are included. While investors have been overloaded, they would give up digesting the information and then surrender self-protection.

Misleading Ads of Loan Products

A donkey work of compliance officers in a retail business is to review the huge amount of marketing materials. While generally more attention is paid to ads of investment products, it doesn't follow that ads of loan products trigger no regulatory concern.

In Australia, ASIC recently raised concerns over their misleading promotional material issued by two home loan lenders, namely One Direct and MyRate.

Between Jul and Sep 2006, One Direct and MyRate advertised a low, variable home loan rate that did not reflect the most recent Reserve Bank interest rate increase announced in August 2006. In fact both lenders had deferred the decision about whether to pass on the interest rate rise, either in whole or in part, until 2007.

ASIC was concerned that:

• the promotional material did not make it clear that the variable rate might be increased at some later stage to reflect the August 2006 interest rate rise;
• customers would not expect a variable rate to be affected by official interest rate increases announced some time before taking out their home loan; and
• the advertised rate was used as the basis for a comparison with another ‘standard’ variable rate, showing long-term savings inconsistent with the potentially temporary nature of the advertised rate.

After ASIC's query, One Direct and MyRate have amended their advertising to better inform potential customers about the nature of their current variable rate. If customers affected by a rate rise inconsistent with the original advertising decide to refinance their loan, they will not be charged a deferred establishment fee by either lender.

Consumer protection in respect of loan product promotion is obviously better in Australia. In Hong Kong, cold callers promoting a personal loan plan would only tell me how low the monthly flat rate (say, 0.7% p.m. for 3 years) is. Without my further enquiry, they would never reveal that the annualized interest rate is up to 15%!

Principles-Based Regulation (2/2)

FSA Chairman expressed in his recent speech that FSA would not move to a regulatory regime based exclusively on principles. There is always a balance between general principles and specific rules. Nevertheless, such a shift would make regulatory enforcement more subjective, but may not reduce the compliance cost.

From the legal / compliance perspective, rules-based approach is definitely making the compliance work easier because the regulations are more certain and so less judgmental. The compliance officer can simply reproduce the specific rules to a checklist and conduct the monitoring by box ticking. This kind of regulation would lead to a large number of "technical breaches" which do not cause any harm to the customers and the market.

On the other hand, the business people would prefer principles-based approach as it is more "flexible", where they can push for a "favorable" interpretation and enforcement of the principles. This would create more confrontation between business units and compliance function.

For example, "treat customers fairly" (TCF) is high level principle always emphasized by FSA. But how many steps are considered sufficent to ensure TCF? Compliance officers may prudently highlight 10 necessary steps, while the sales team may argue that only 8 steps are enough. Eventually the compliance status is judged by the regulator by the "outcome" (e.g. a customer complaint for unfair selling process). The problem is how the compliance officer could anticipate the outcome and convince the management beforehand.

So that's why high level principles must be supplemented by industry guidelines to facilitate the interpretation. In HK, SFC has heavily relied on rules-based regulations, especially in the areas of operational issues (e.g. safeguarding of client assets). To cope with the complex and ever-changing market practices, I think SFC should issue more practical industry guidelines for different regulated activities. As a minimum, the "Management, Supervision & Internal Control Guidelines" should be updated or even re-written.

Principles-Based Regulation (1/2)

Principles-based regulation and rules-based regulation are two different regulatory approaches. The former sets out the regulations in terms of high level principles and defines violation by outcomes (e.g. a case of unfair treatment of customer is found). The latter makes regulations as specific rules and identifies violation by "box ticking" (e.g. failure to take a step required by the rulebook is identified).

Last week FSA published its proposals for a radical simplification of the rules that firms must follow in carrying out investment business with customers. The reform of the Conduct Of Business (COB) rules is a flagship project for FSA in the move towards more principles-based regulation and away from detailed prescriptive rules.

FSA's Conduct of Business rules for investment business have been in operation since the FSA took on its regulatory responsibilities in December 2001. The rules cover, among other things financial promotions, how firms provide information and advice to clients, non-advised services, and dealing in and managing investments. The new COB rules are strongly in favor of high level principles.

FSA also set out plans to encourage greater use of Industry Guidance to help their members understand and follow good practice in meeting regulatory requirments. A Discussion Paper sets out the FSA's thinking on the role of Industry Guidance in a more principles-based regulatory structure. The paper:

• recognises that industry guidance is not new, but already exists in different parts of the regulatory system;
• makes clear that industry guidance will supplement rules not replace them;
• sets out a standard process for FSA to recognise industry guidance;
• makes clear the standards that will be applied in recognising such guidance; and
• confirms that the FSA will not take action against a firm which has complied with recognised guidance covering the issue concerned.

The move toward principles-based regulation means focusing on the outcomes that really matter rather than on procedural box-ticking. It also gives firms the flexibility and innovation to achieve those outcomes in the context of their particular business models.

As a compliance officer, which regulatory approach do you prefer?

Payment Protection Insurance

If you are a bank borrower, from time to time you may receive cold calls from banks for selling the payment protection insurance (PPI). PPI is a secondary product with a loan or mortgage to provide protection in the event of accident, sickness, involuntary unemployment or death. As this is not an investment product, mis-selling cases are quite rare in HK. But in UK the consumer protection is so extensive to cover PPI.

FSA recently fined Loans.co.uk (LCUK) £455,000 for failings to minimize unsuitable sales of PPI. LCUK's primary business is as a second charge loan broker. It sold PPI on an advised basis using a script delivered over the phone when the loan or mortgage was arranged.

FSA found that LCUK failed to:

• gather sufficient information about personal circumstances prior to making a recommendation to customers;
• ensure that in the phone call advisers would give adequate disclosure of significant features, terms and exclusions to customers;
• ensure that advisers followed the scripted process and consistently recorded the customer information gathered over the phone;
• implement an adequate monitoring system to ensure suitability;
• put in place a sufficient record keeping procedures; and
• implement adequate complaint identification and handling procedures.

Based on an internal audit report, it was also found that the compliance department was not fully independent from the business units. The compliance resource was also insufficient.

Telephone sales are usually controlled by the scripts which should have been reviewed by compliance. In addition, compliance should perform sample checks to ensure that the scripted process is adequately followed. This is quite a time-consuming job. If even general insurance products like PPI are also covered, I can't imagine how big the compliance department should be.

Email Monitoring

One of the recent hot topics is whether the leading role of New York Stock Exchange has been challenged by London Stock Exchange and even HKEx. New York's Economic Development Corporation last month appointed McKinsey to research whether stiff US regulations are driving companies to list in London rather than New York. Sarbanes-Oxley Act is one big headache. Another concern may be the monitoring of electronic communications.

Today's businesses have relied heavily on e-mail as their primary business communication channel. While in the past firms in the finance sector were only required to monitor the telephone lines, now email monitoring is becoming another area of concern.

A survey was recently conducted at the same time for 300 people working in two of the world's busiest financial districts (New York and London), which revealed a key difference in regulatory compliance culture.

The survey discovered that:

• In New York more than 60% of respondents thought that it was right that their employer should monitor their e-mails. By contrast, in London only 38% supported their firm's right to monitor e-mails.
• Employees in the New York are under heaviest scrutiny. In New York 74% of respondents who worked in the finance sector thought their e-mails were already monitored, compared to 62% of London finance workers.
• New Yorkers are more likely to circumvent e-mail monitoring: 60% admitted that they had sent something that they "didn't want their employer to know about" using webmails. This compared to 42% of London respondents.
• More than 70% New York-based finance workers admitted they had received an e-mail that broke corporate or regulatory policies, compared to just 36% of London City employees.

The differing regulatory environments between New York and London may lead to the difference in competitive advantages. While it is unlikely US would relax its regulations, it should consider simplifying the compliance procedures. To strike a balance between regulatory compliance and privacy, technology should be creatively used to effectively manage communication and enforce good messaging governance.

Customer Complaint (3/3)

In HK, there is no public platform for arbitrating customer complaints about financial products / services. The roles played by mass media and Consumer Counsil are only criticizing.

But in UK, the Financial Ombudsman Service (FOS) was set up by law to help settle individual disputes between financial institutions and their customers. FOS can consider complaints about a wide range of financial matters - from insurance and mortgages to savings and investments. The key point is: such service is free of charge!

FOS is not a regulator but can settle disputes as an alternative to the courts. Its determination binds both the customer and the financial institution.

From time to time FOS publishes its determined cases (with disclosing the names), which are of good reference. I had seen a case where the customer challenged the method used by the financial adviser to compute the return of a with-profit bond. FOS dismissed this complaint because it considered that the customer's own calculation of return failed to take into account the "smoothing mechanism" of a with-profit bond.

Many people tend to abuse their right to making complaints whenever they lose money from their investments. This is problematic. Valid complaints should demonstrate the fact that the suitability of advice has been impaired, which is judged not by the investment result but by the selling process.

Customer Complaint (2/3)

Handling of customer complaints is more of an art than a science. While fact findings are critical, many other human and political factors have to be taken into account.

Typically in a mis-selling case the compliance officer should conduct an independent investigation and ensure the final response is timely given to the customer. The staff subject to complaint should not be allowed to get in touch with the customer further. I had seen cases where the staff took the initiative to settle the issue privately with the customer but eventually made things worse.

The difficult decision made by the management is whether a compensation should be paid. Sometimes even no fault was found in the selling process the bank may still pay in order to save time and maintain the customer relationship, esp. when the amount involved is small. In that situation, the bank would issue a letter which admits no liability but comforts the customer by making a courtesy payment, and requests the customer to shut up.

But when the complainant has already escalated the case to regulators or media, then the condition would become more confrontational. Courtesy payment may no longer be an option. The bank must thoroughly find out if the complaint is valid. It should ascertain whether there are internal control weaknesses, insufficent trainings, or simply an isolated case of staff misconduct. Sometimes a mis-selling case may be associated with an unregistered staff, then the regulatory risk would be much higher.

If the complaint case is lodged with HKMA, then what would happen? Unless the case involved an obvious breach of regulations, most probably HKMA will ask the bank to settle with the customer. It will not play an arbitration role but always ask for detailed reporting from the bank.

Customer Complaint (1/3)

As Mrs Tung said, HK people like to "complain, complain, complain". This represents the progress of democracy and higher awareness of consumer protection. In the financial industry, selling of investment and insurance products trigger the most difficult complaints.

As a compliance officer, part of his jobs is to investigate into complaints and advise the business people how to give an appropriate response. When I was working in banks, I had handled some interesting complaint cases about misselling of investment products. Just want to mention 3 special categories of complainants here.

Elderly Customers

Such kind of customers are loved and hated by the salespersons. On the one hand, they have a great purchasing power because they are used to keeping their savings as deposits. On the other hand, they are in generally less educated and have a limited investment horizon. Selling of long term structured products to them is quite risky. Their complaints are generally well received by both regulators and media.

But are all elderly customers "victims"? I had seen some greedy old ladies who proactively asked for purchasing high return (and of course, high risk) products. Whenever they lose money, they would pretend to be ignorant and innocent!

Professionals

They are typically lawyers or CPA. Usually they would not complain for being cheated by salespersons (face problem?), but they like to challenge the computation of product performance. They know how to play the game of complaint by sending a "professional letter" to the bank's senior management. Then the bank staff (including compliance officers) would spend a number of hours to draft a prudent reply. If the compensation demanded is just a few thousands, the senior management may surrender even the complaint is unreasonable!

Powerful Persons

Such persons would allege they have an "unusual background". They may claim to know "somebody" in the government or some large enterprises. They may even threaten (verbally) to challege the physical security of the salesperson if no compensation is paid. I had once seen a salesperson who was forced by the pressure to resign and leave HK!

Tomorrow I will talk about the handling of customer complaints.