YIPPEE! Structured product problems have finally been settled.

--TNP PHOTO ILLUSTRATION: SIMON ANG

The outcome is that brokers and especially banks look generous with 58 per cent of the cases reviewed receiving full or partial compensation.

While the number of payouts is impressive, there has been no disclosure about how much they paid.

A rather basic question is: 'How can we conclude the banks and brokers have made generous payouts without knowing the payouts?'

As it turns out, financial institutions could end up paying little to compensate investors for mis-selling. I'll tell you why.

Maybe not so generous

MINIBONDS

A close look at the data shows that between Minibonds and DBS High Notes 5, almost all settlements - 90 per cent - have gone to Minibonds.

These are likely to have been smaller since only $5,000 was required to invest in Minibonds compared to $25,000 for High Notes 5.

Second, Minibond compensation is not free. Investors pay for it when they surrender their Minibonds to the bank or broker. That can be costly since Minibonds have value, especially for the early series which holds higher quality bonds.

Some investors incorrectly think Minibonds have no value. On 21 Dec, The Sunday Times revealed how a reporter's mother was advised that her Minibonds became worthless when Lehman Brothers went broke.

Wrong advice like that makes investors more inclined to accept whatever compensation offers come along.

DBS HIGH NOTES 5

The DBS compensation may also be overstated at $70 million. That figure also includes Hong Kong where more structured products were sold. The bank declined to provide a breakdown.

There is a second reason the payouts could cost DBS a lot less than $70 million. As the underwriter for High Notes 5, DBS appointed itself the counterparty to receive all investors' money - $103 million - should a 'critical event' occur.

It happened when Lehman Brothers defaulted. DBS then announced that it had already sold off its counterparty rights, supposedly for less than $103 million.

I asked but the bank declined to disclose the sales date, price, contingencies or the buyer's affiliation, if any, with DBS.

Banks define the playing field

Banks and brokers have appointed themselves to be the official definers of the word 'vulnerable'.

They say it turns on age and education. Hong Leong Finance, for example, says vulnerable investors are aged 62 or older at the time of sale and with no more than a primary school education.

Courts usually take a different approach and favour written evidence - like a prospectus - over verbal evidence.

It does away with conflicting claims about who said what and who is smart or dumb. There is no need to assess an individual's vulnerability since all investors are affected by errors and omissions in the prospectus.

In a case with similarities, global banks were ordered in the US to buy back $80 billion of auction-rate notes they had mis-sold to investors and pay $750 million in fines.

To avoid huge settlements and fines like that, financial institutions need to define 'vulnerable' narrowly, according to an investor's age and education. A broader definition, based on errors and omissions in the prospectus, would include all investors and likely require greater compensation.

DOC MONEY'S QUICK QUOTE:

'When a man tells you that he got rich through hard work, ask him: 'Whose?'
- Don Marquis

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