Sunday, July 28, 2013

Hong Kong Authorities Reach Agreement with RBS on Lehman Brothers Equity Notes

The Securities and Futures Commission and the Hong Kong Monetary Authority have announced an agreement with The Royal Bank of Scotland N.V. (RBS), formerly known as ABN AMRO Bank N.V. in relation to the sale of Lehman Brothers-related equity-linked notes to retail clients between July 2007 and May 2008. RBS has agreed, without admitting any liability, to make a repurchase offer to all eligible customers holding outstanding equity-linked notes sold by the bank at 100% of the principal value of each eligible customer’s investment in the note. This resolution provides them an opportunity to reverse their purchase of the outstanding notes. The SFC estimates about 540 customers are eligible for the repurchase offer under this resolution which, if accepted by all, will lead to payments of approximately $513 million. The repurchase offer will not be offered to professional investors. The SFC’s investigation into the handling of professional investors by RBS in respect to the notes is continuing.

The SFC’s Chief Executive Officer Ashley Alder cautioned that the problems caused by the errors in ABN Amro’s processes should send a warning to all intermediaries who seek to automate suitability processes with matching systems. Mr. Alder emphasized that an automated process cannot replace governance disciplines and professional judgment in assessing whether an investment advice or recommendation is reasonably suitable for the customer.

The eligible customers are retail customers holding outstanding Lehman equity-linked notes who were assessed to have a risk tolerance level that was more conservative than the risk rating assigned to the notes purchased by the customer. The risk profiling process in issue in this case was developed by ABN Amro prior to RBS’ acquisition of ABN Amro’s retail and commercial banking business.

RBS will also make top-up payments to retail customers with whom RBS has entered into settlement agreements in respect of their holding of outstanding notes but would otherwise have been eligible to receive a repurchase offer to ensure these customers are treated in the same way as other customers participating in the repurchase scheme.

In view of the repurchase scheme, the SFC will not impose disciplinary sanctions against the bank and its current or former officers or employees in relation to the sale of the notes to retail customers, save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature. Similarly, the HKMA informed the bank that it does not intend to take any enforcement action against their executive officers and relevant individuals in connection with the sale of the notes to customers who have accepted the repurchase offers or the top-up payments under the repurchase scheme, except for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.

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