According to news reports, 58% of the investors will get some or all of their money back. Any investor who is unhappy with his outcome may seek further recourse through the Financial Industry Disputes Resolution Centre (FIDREC).Of course, many of those unhappy investors who turn to FIDREC will be the ones to whom the banks had offered no compensation at all.
A little bird has just told me that the banks, in deciding which investors to compensate, seems to have relied heavily on their internal risk classification of the clients.
What does this mean?
Before a bank sells you a product, it is supposed to ascertain your risk profile. The salesperson goes through a questionaire with you, and you answer various questions about your age; your savings; your financial goals; your willingness to take risk etc.
Based on your answers, the salesperson then determines your risk classification. It's common for banks to use a 5-tier system. For example, the customer could be classified as either "Aggressive", "Moderately Aggressive", "Balanced", 'Moderately Conservative" or 'Very Conservative".
Based on your risk classification, the salesperson will recommend suitable products to you. For example, if you are a "Conservative" investor, the salesperson will recommend lower-risk products (which are safer, but also offer lesser chances of a high return). If you are "Aggressive", the salesperson may recommend riskier investments to you.
Back to the Lehman Minibonds and the High Notes. At the time that the customer first made his investment, the bank would have determined his risk classification. And now, it seems that the banks are relying heavily on that risk classification, to decide whether they will compensate that investor or not.
For example, it appears that as a general rule, DBS is not compensating High Notes investors who had been classified as "Moderately Aggressive" or "Aggressive". In other words, DBS is taking the position that the High Notes were a suitable investment for "Moderately Aggressive" or "Aggressive" investors. Therefore these investors do not deserve compensation.
In my next post, I will discuss the problems in this line of reasoning.