Crude Oil Treasure' Debacle Leads to Fine for Chinese Bank

By Chong Koh Ping and Xie Yu 

One of China's biggest banks has been fined nearly $8 million over an investment product that generated big losses for individual investors when U.S. oil prices briefly went negative.

Bank of China Ltd. was fined 50.5 million yuan, the equivalent of $7.7 million, and four of its global markets staff were fined a further 1.8 million yuan, the equivalent of $280,000, after an investigation into the "Crude Oil Treasure" product, the China Banking and Insurance Regulatory Commission said Saturday.

Many investors in the product were wiped out when U.S. crude futures settled at an unprecedented minus $37.63 a barrel in April--and were told they also had to compensate the bank for the negative value of their holdings when those were sold.

Some investors later said the state-owned bank had offered to return 20% of their initial investments and cover any further losses.

The regulator said Bank of China had broken several laws and regulations. Among other things, it cited problems with contract terms and internal controls, including unreasonable incentives for staff. It said some clients were allowed to invest despite being too young to buy the product, and the bank used exaggerated advertising and offered gifts to attract customers.

Bank of China said it had made changes as required by the regulator, including reviewing potential risks, improving risk controls, and standardizing sales management. "In future, the Bank will conduct its business operations more prudently and at a higher professional level," it said in a stock exchange filing Sunday.

Some investors haven't accepted the bank's earlier deal and are still seeking redress in court. Zhang Ye, a 35-year-old mechanical engineer in the southeastern city of Zhuhai, said he wants the bank to restore at least half of his initial investment of around 200,000 yuan and provide a clearer explanation of what went wrong.

Mr. Zhang said that after filing a lawsuit at a local court in October, he got a call telling him to wait until several similar cases could be handled collectively. "I am not hopeful about getting more compensation, " he said. "I hold on because I think what has been done by BOC isn't fair and we deserve a better explanation."

Chen Shujin, a banking analyst at securities firm Jefferies, estimated the episode could cost the bank 6 billion to 10 billion yuan, including costs for lawsuits and arbitration. "Overall, the revenue that BOC can earn from such products is not that much...yet they have incurred steep losses and are now being slapped with additional penalties. They will be much more careful in the future," she said.

Large Chinese banks have suspended offering similar commodity-related investments as the underlying asset prices tended to be volatile, she said. "[Banks] will have to reconsider how to classify these products and redesign them," she said, perhaps marketing them only to private investors with very high risk tolerance.

Write to Chong Koh Ping at [e-mail] and Xie Yu at [e-mail]

(END) Dow Jones Newswires

December 07, 2020 04:27 ET (09:27 GMT)

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