Thomas Atkinson, executive director of enforcement at the Securities and Futures Commission (SFC), delivered the remarks at FinanceAsia’s fifth Compliance Summit North Asia in Hong Kong. He was speaking just weeks after UBS and Standard Chartered announced they were being investigated for their work as sponsors of Hong Kong IPOs.
“You can expect to see more cases coming from that area,” he said. “And we’ll look at these firms and the senior management accountable for these cases.”
The SFC’s push to encourage more thorough due diligence by IPO sponsors has gained momentum since Atkinson took over in May. But he made clear there is plenty more work to do — and said the enforcement team got “a steady stream of referrals” from the corporate finance division, averaging around 50 cases a year.
IPO sponsors essentially vouch for a company that wants to list on Hong Kong’s stock exchange, but only after doing exhaustive due diligence on the company. That is the theory, at least — but Atkinson said all too often the reality has been sloppier.
“I think we need a lot of work in this area…and I think the level of professionalism demonstrated in this area left a lot to be desired,” he said.
There are as many as a dozen serious investigations going on at the moment, a source who works with both the regulator and bankers on enforcement issues told FinanceAsia at the end of last month.
A new regime
Hong Kong’s IPO sponsor regime is designed to make banks the ‘gatekeepers’ of market quality, forcing them to investigate potential listing candidates before applying to the exchange. But since these banks earn fees from managing the IPOs, there is a potential conflict of interest.
In October 2013, the SFC announced tougher rules on IPO sponsors and told banks they needed to do better – and earlier – due diligence of potential IPO candidates, adding potential criminal liability to those firms that failed to do a proper due diligence as required.
In April 2012, the regulator revoked Mega Capital Asia’s corporate finance licence, relating to the firm’s sponsorship of an IPO by clothing company Hontex in 2009. But since the new sponsor regime came into force in 2013, the SFC appears not to have stripped a firm’s licence.
Bankers are now left wondering whether that is about to change. While ECM bankers spoken to by FinanceAsia tried to put a brave face on the SFC’s clampdown — with some arguing that, in the long-run, they will be helped by a cleaner market — it is clear that the regulatory risks for banks are only growing. The possibility that UBS could lose its corporate finance licence is a palpable example.
“The potential revoking of the licence of UBS is very shocking, as we have not seen that before for any international banks,” said a Hong Kong-based in-house counsel at an investment bank. “No-one really knows how likely it is, but with the new enforcement head the regulator is taking [its role] more seriously now.”
Standard Chartered, while being investigated by the SFC, does not need to fear losing its licence. The firm shut down its equities business in 2015.
Atkinson’s tougher stance is clearly a threat to banks, but the scarier risk appears to be to their staff. Individual bankers need to put their name behind IPOs — and accept legal liability if companies have misled investors in their prospectuses.
Before leaving the summit, Atkinson sat in the audience and watched the presentation of Kyle Wombolt, global head of corporate crime and investigations at law firm Herbert Smith Freehills.
He asked Wombolt what the regulator could do from an enforcement point of view to change behaviour. Wombolt made clear that individual accountability, rather than accountability at the corporate level, was the key.