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SFC, HKMA and The Royal Bank of Scotland N.V. reach agreement on Lehman Brothers-related equity-linked notes

The following is issued on behalf of the Hong Kong Monetary Authority:

     The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) announced today (July 18) that an agreement has been reached with The Royal Bank of Scotland N.V. (RBS), formerly known as ABN AMRO Bank N.V., (ABN Amro) in relation to the sale of Lehman Brothers-related equity-linked notes (LB-ELNs) to retail clients between July 2007 and May 2008 (Notes 1, 2 and 3).

     RBS has agreed, without admitting any liability, to make a repurchase offer to all eligible customers holding outstanding LB-ELNs sold by the bank (including those sold by ABN Amro in Hong Kong before the acquisition by RBS of ABN Amro's retail and commercial banking business) at 100% of the principal value of each eligible customer's investment in the LB-ELNs. Today's resolution provides them an opportunity to reverse their purchase of the outstanding LB-ELNs.

     The SFC estimates about 540 customers are eligible for the repurchase offer under this resolution which, if accepted by all, will lead to payments totalling approximately $513 million.

     The eligible customers are retail customers holding outstanding LB-ELNs who were assessed to have a risk tolerance level that was more conservative than the risk rating assigned to the LB-ELN 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.  

     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 LB-ELNs is continuing (Note 4).

     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 LB-ELNs 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.

     The offer price will exclude the amount of coupon already paid to eligible customers and any recovery by the eligible customers in respect of the relevant LB-ELNs out of the bankruptcy of Lehman Brothers Holdings Inc. or its related entities. The offer price will include an additional amount representing the interest that would have been earned if the amount invested in the LB-ELNs had been invested with the bank on a savings deposit (Note 5).

     During the course of the SFC's investigation, the SFC raised a number of concerns with RBS regarding the risk assessment and the risk matching process used by the bank at the time, in particular:

* Each customer was provided with a risk profiling questionnaire in which answers were scored. The customer's ultimate risk score determined their risk profile or tolerance level which, in turn, was used to assess the relative suitability of LB-ELNs for each customer. However, the scores assigned to two out of 12 questions in the risk profiling questionnaire were weighted erroneously which led to some customers' risk tolerance level being assessed as higher than it should have been if the correct weighting had been applied (Note 6);

* Further, the bank classified all series of LB-ELNs, except for two, as high risk products under its three-level risk rating system.  However, the LB-ELNs were sold to customers who were assessed to have a medium or low risk tolerance level without proper records of justification for so doing (Note 7).

     In entering into this agreement under section 201 of the Securities and Futures Ordinance (SFO), the SFC has taken into account:

* there is no distributable collateral for the LB-ELNs. As such, there is less chance for LB-ELN customers to receive any substantial payment or dividend in the Lehman Brothers bankruptcy proceedings (Note 8);

* the repurchase scheme will enable eligible customers to receive 100% of the principal value invested in the LB-ELNs without the costs and risks of separate legal proceedings;

* the processes that caused concern for the SFC were not devised by RBS which inherited these issues following its acquisition of ABN Amroˇ¦s retail and commercial banking business;

* RBS will review complaints lodged by LB-ELN customers who are not eligible for the repurchase offer under its enhanced complaint handling procedures. The case by case enhanced complaint handling procedures should address any other possible irregularities in the sale of the LB-ELNs to customers with high risk tolerance level under RBS' risk profiling processes;

* this outcome could not have been achieved through the imposition of disciplinary sanctions by the SFC against RBS and/or its staff, even if such action was successful; and

* the agreement will bring the matter to an appropriate end for the benefit of RBS and those customers who participate in the repurchase scheme.

     "This was a time consuming investigation that involved our investigators combing through tens of thousands of documents and listening to hours of telephone recordings. 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. An automated process cannot replace governance disciplines and professional judgement in assessing whether an investment advice or recommendation is reasonably suitable for the customer," the SFC's Chief Executive Officer, Mr Ashley Alder said.   

     Ms Meena Datwani, Acting Deputy Chief Executive of the HKMA, said, "This agreement with RBS represents the outcome of the investigatory efforts by the two regulatory authorities.  The HKMA considers the agreement to be in the interests of the investing public as it allows eligible customers to recover the money they invested without the need to go through lengthy and costly legal processes."

     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 LB-ELNs to RBS' retail customers (other than professional investors), save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.  
     The HKMA has also 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 LB-ELNs 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.

Ends/Thursday, July 18, 2013
Issued at HKT 20:46


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