The deal covers around 29,000 investors who were sold so-called mini-bonds backed by US investment bank Lehman Brothers, according to a joint statement issued by the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA) and the banks.
The deal was brokered by the two regulators and the banks. The refunds could cost the 16 institutions who agreed to the deal up to 6.3 billion Hong Kong dollars (S$1.17 billion).
Martin Wheatley, chairman of the SFC, said the settlement was "a watershed" in the regulation of financial services.
"The scale of the settlement is unprecedented in Hong Kong, if not in other jurisdictions," he told a news conference.
Under the deal, the banks will repurchase from each eligible customer aged below 65 all outstanding mini-bonds at 60 percent of their nominal value.
Those aged 65 or above will be able to recoup at least 70 percent of their investment in the products.
The ultimate payout to investors may be higher if the banks are able to sell the underlying collateral linked to the minibonds, the regulators said.
Wheatley said the total amount the investors could receive would be equal to or greater than what they could otherwise recover at today's current market value.
He said although the deal concluded the SFC's investigation into the mis-selling cases, investors still dissatisfied with the terms could seek redress through legal channels.
He nevertheless pledged to continue the SFC?s investigation in unresolved claims.
"In no way are we giving up our right or ability to investigate unresolved cases," he said.
In January, leading Hong Kong brokerage Sun Hung Kai Investments agreed to repay around 85 million dollars to 300 investors in a full refund after the SFC reprimanded its sale of the minibonds.
Asked why the banks could not follow the brokerage's example, Wheatley said Sun Hung Kai's case was different as it involved fewer investors and a smaller amount of money.
Some investors were nevertheless angry that they could not get a full refund and Wednesday protested in the lobby of the SFC office in Central district, where dozens of police officers and security guards tried to maintain order.
Peter Chan, chairman of the Alliance of Lehman Brothers Victims, told AFP: "Although some elderly investors will be able to recover most of their investment, I am very disappointed because the SFC has indicated it will not investigate these cases any more after the settlement."
The value of the products, which were sold as safe investments, collapsed when Lehman went failed last September.
The scandal has rocked Hong Kong's financial centre and led to a string of protests by disgruntled investors, many of whom were elderly and said they did not understand what they were being sold.
In May, the SFC won another victory when a Hong Kong court supported the regulator's request to block the privatisation of telecom giant PCCW amid allegations of vote-rigging.
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