Hong Kong's Lehman mini-bonds saga, in which outraged investors lost millions with the collapse of what was once thought to be an impregnable American financial institution, appears to be finally coming to an end, potentially drawing the curtain on a 10-month nightmare for both investors and regulators, given what the Securities and Futures Commission reportedly described as a 'good compromise."

But before crediting the SFC for putting an end to the misery of the 30,000 beleaguered investors, or before the regulator champions itself for its masterstrokes, be forewarned that the impact of the Lehman mini-bonds saga could have been minimized, if not prevented, if the SFC had acted decisively three years ago in a similar case involving Clerical Medical Insurance, a unit of Halifax Bank of Scotland. But from its inception, the SFC has been a largely toothless watchdog, occasionally gumming on some luckless small offenders and largely leaving the heavyweights alone.

Under the terms of the Lehman settlement, announced July 23, 16 banks agreed to return US$807 million - about 60 cents on the dollar -- to investors, with BOC Hong Kong Holdings agreeing to stump up nearly half of that, at US$401 million. The 16 banks sold an estimated US$1.8 billion of the so-called mini-bonds, which fell sharply in value after the US investment bank Lehman Brothers Holdings was forced into bankruptcy last September.

Just as with Lehman, the CMI case involved gross mis-selling of financial investment products - larger in scale in dollar terms but less well known.

The SFC could have punished the wrongdoers to send out the right message, restructured the regulatory landscape to prevent any similar episodes and seized the opportunity to demonstrate its seriousness in dealing with misconduct of financial institutions.

No, thank you. The SFC did none of the above. What it eventually did - investigate the case but take no action - was to splash out television advertisements to forewarn investors to be alert and ask the right questions when making investment decisions, without tackling the core of the problem. The timing was critical: had the SFC taken the right measures then, it would have been between 2005-2006 when the Lehman minibonds were flowing into the Hong Kong market.

Obviously those splashy TV ads didn't work but the SFC has once again resorted to an even larger scale commercial campaign to accompany its new television advertisements following the Lehman case.

The earlier case refers to a product generally known as "offshore with-profits" (OWP) funds, sold in Hong Kong via several carriers but largely through market leader Clerical Medical Insurance (CMI) which alone has reportedly over 7,000 wealthy investors, mostly expatriates, with what many said amounted to some billions of US dollars invested - CMI was part of HBOS (Halifax Bank of Scotland), the largest mortgage and savings provider in the United Kingdom, which was bought by Lloyd's early this year and subsequently bailed out by the British government.

The OWP products were never sold directly by CMI but through many independent financial advisers , or IFAs, acting as intermediaries. Potential investors were encouraged to gear up to three times their own investment to maximize gains, given the supposedly good track records of these funds. These investors later said their advisers, motivated by extra commissions, only emphasized the upside but never forewarned them of the potential downside risks involved with gearing. The IFAs in turn claimed the marketing materials they used originated from CMI - whose products were approved by the SFC - though the company denied it ever promoted gearing.

The investors who geared up not only lost most of their principal but had to repay part of their loans when the value of their fund holdings pledged as collateral fell sharply, after the OWP funds performed badly following market shocks in the aftermath of the September 11 attacks in 2001, when CMI found itself on the wrong sides of the equation in the investment markets.

While not all investors were geared, all who tried to get out of the funds were subject to exit penalties, known as "market value adjusters" (MVAs), which reached more than 25 percent at some stage - neither did CMI nor the IFAs explain much about these MVAs or mentioned how high the MVA rates would reach in their sales pitch, according to many angry investors.

Either way, these investors found themselves stuck with huge losses and some are still pursuing lawsuits today to fight their cause.

Much like the Lehman mini-bonds case, the CMI matter was one of gross mis-selling to potential and unwary investors - in the latter, mostly highly educated professionals. Just like the Lehman case, the CMI products were approved by the SFC.

And like the Lehman case, the CMI products were sold through a retail distribution channel with frontline sales staff carrying approved brochures. More importantly, both cases featured gross mis-selling with commission-driven sales staff allegedly more eager to secure signatures than to explain in detail the complexity of the financial products, if they understood them at all, on the table.

With such parallels, and perhaps sadly on hindsight, one may be tempted to blame the SFC for not doing enough to protect the interest of the public.

One may also argue that the SFC did the right thing in both the Lehman and CMI cases: that investors took their risk, informed or ill-informed, calculated or speculative, even though the products were approved and by that token the SFC can only resort to public education via commercial advertisements.

Granted, but the reality is the public placed trust in the regulators to have the house in order with little or hopefully no room for any propensity to mislead potential investors, rich or poor alike. The regulators of today's ever increasingly complex financial markets are also expected to have an iron grip on the conduct of its players and act swiftly to correct any disequilibrium.

But in the Hong Kong context, there is much more the SFC could have done over the years to build a more efficient and better regulated financial market to protect the public - and thus prevent the resulting bad press from the Lehman mini-bonds saga.

For starters, one may question if the frontline sales staff of financial products, including professional independent financial advisers, are properly qualified. After all, much like doctors and surgeons whom we count upon for life or death, the men on the street rely on these financial intermediaries for their financial well-being - the Lehman case in particular has thrown this issue into the spotlight given the highly complex financial instruments involved.

Regulators and related supervisory trade bodies in Hong Kong will be quick to point out the Continuing Professional Development (CPD) program, found in several professional industries as a well managed way to update its members and also renew licenses.

Sounds good? But what good can there be if the IFAs (with a considerable number of non-Chinese speaking Western expatriates) cannot understand a word in some of these Cantonese-only classes? This was the situation faced by some insurance professionals and IFAs, according to sources, and all they need is to find ways to kill time and mark their attendance at the end of the courses to gain the necessary credits.

"They do not even check if you are fluent in the language in which the course is given," said a practicing insurance broker. "Most attendants just sit in the venue for 2 hours playing games on their mobile phones, or by catching up with sleep. The quality of the speakers, most of the time staff of law firms eager to advertise their firm's name and they work free of charge, as I understand, is poor to very poor."

Certainly not the best way to update on the latest financial literature.

With the blurring of lines in the modern financial sectors, cross-selling has become commonplace, thus we find insurance companies selling investment-type products and banks selling insurance-related products. Consequently, insurance professionals and IFAs need the appropriate licenses to sell complex financial investment products. In Hong Kong, insurance professionals with the appropriate license from any of the two respective insurance brokers associations earned the license to sell while those who gained a license from the SFC, being the IFAs, have the license to advise on investment-type products, industry sources say.

The implications may not be obvious to casual observers, according to some market professionals. A person with only a license to sell means he cannot offer any advice on the products he tried to push to his potential client. Consider the client may (inevitably) ask questions about the products. What can the financial intermediary say? "Sorry, I can only sell you these and not licensed to offer advice. So just pick one and sign"?

Sorry, that is not how the real world works.

Perhaps the regulators should get rid of the license to sell and offer just the license to advise requirement so as to better protect the public interest?

The one other troubling issue that remains: commissions. In both the Lehman and CMI cases, the financial intermediaries were allegedly motivated by commissions earned from the sales transacted. How else do you suppose salesmen work - thus we cannot possibly remove commissions out of the equation, can we?

Hence, the SFC took the right stance that investors take their own risks given the best information they can gather - ie, market risk. However, if the financial markets are not properly regulated, giving way to mis-selling, investors are exposed to further (non-market) risks.

Sadly, Hong Kong investors have short memories, especially when faced with lucrative offers. With the Lehman mini-bonds saga soon to be behind us, one can only hope that the SFC took cues and promptly put things in order before another similar episode surfaces.