Accumulators: Route to financial bonanza or wealth destruction?

How often had your bank officers asked whether you would like to invest in financial products that would allow you to earn returns that would exceed many more times the rate of return on your savings deposits?

Many of our clients have had such an approach by their bank officers. The bank officers, after reviewing the clients’ bank account balances, were greeted with glee as there were so much money in the savings accounts earning virtually little interest though they are their life savings and without fully explaining the nature and the material risks of the financial products including that the bank officers will earn attractive commission for the clients to invest in the financial products, recommended risky financial products to the clients.

One such risky financial products highly recommended by banks were accumulators. An accumulator is a financial product that would allow you to purchase a specific number of shares of a company listed on the Hong Kong Stock Exchange at a fixed price usually over a year but divided into 26 bi-weekly observation periods.

The number of shares that a customer is entitled to purchase is determined by the price of the share on each trading day during the 26 bi-weekly observation periods. If the price of the share is greater than or equal to the prescribed price called the leverage trigger price (which is generally at a discount to the spot price (“Spot Price”) set under the contract and the Spot Price is generally below the market price of the share at the commencement date of the contract) on a trading day within the observation periods, the customer would be required to purchase N (specific number) of shares at the leverage trigger price. If the price of the shares is lower than the leverage trigger price on a trading day within the observation periods, then the customer would be required to purchase double the original quantity that is 2N also at the leverage trigger price.

If the market price of the share rises above the prescribed price called the knock out price (which is generally at a premium to the Spot Price) on any trading day within the observation periods then it would be regarded as a knock-out event. The accumulator would then be determined. After determination of the accumulator, the customer is not entitled or obliged to purchase any more of the shares under the accumulator.

Regrettably many of our clients that came to us had not been properly and fully informed of the risks involved before purchasing the accumulators. Many were not aware that they were required to purchase 2N number of shares for the duration of the accumulator even if the market price of the share fell below the leverage trigger price.

In addition the banks have refused to allow the clients to terminate the contract early. However, with the assistance of us, we managed to assist our clients to terminate early such contracts so as to limit their loss otherwise they would be obliged to continue to purchase the shares at the leverage trigger price, which is higher than the prevailing market price of the shares in a falling market, pursuant to the accumulator. Upon early termination of the contracts, the banks would charge the customers an early termination fee but how that fee is arrived at is not make known despite request for such information. The bank’s response is that it is the sum arrived at by a third party and they do not know how that sum is arrived at.

Many of the banks’ frontline staff is not equipped to assume the responsibility to understand let alone explain the material terms of the accumulators to the customers. Query whether they possess the relevant licences and had been properly trained to assume such responsibility.

In our opinion, the banks, when they assumed the role of advising the customers, are fiduciaries to the customers and owe a general duty of care. By not fully providing the material information including fully disclosing the risks to the customers they are in breach of their duties including fiduciary duty.

In addition, the banks including the bank officers could also be guilty of fraudulent misrepresentation to their customers. An instance of such a case though not an accumulator is the Lehman Brothers bonds where certain bank officers have been charged with fraud by the police by fraudulently misrepresenting the bonds to their customers.

Further it could also be argued that there was an inducement by the banks to their customers to invest in the accumulators by emphasizing on the prospective returns without disclosing all the material risks.

After realizing their mistakes, the banks were merely digging their heels and initially refused to provide information and documents to their customers as experienced by our clients. Only after legal proceedings had been commenced where discovery was sought would the banks disclose some but not always all relevant documents. We had to resort to specific discovery to obtain further relevant and material documents from the banks. The banks also agreed to mediation so as to reduce publicity as the terms of settlement are confidential and privy to those involved in the mediation.

If there is any aspect of this matter, you would wish to discuss or if you feel that you are victims of the above unfair tactics employed by the banks and would like justice to be done, please contact our senior partner Mr. Junius Ho and our partner Mr. Anthony Chow.