UBS hit with HK IPO ban as SFC steps up crackdown

Hong Kong's securities regulator bars Swiss bank from sponsoring IPOs for 18 months as it intensifies efforts to ensure the quality of newly-listed companies and protect investors.

UBS's Asia investment banking business is facing a massive blow after Hong Kong's securities regulator slapped it with an 18-month ban on sponsoring initial public offerings in the city. 

In perhaps its harshest penalty ever on a bulge-bracket investment bank, Hong Kong's Securities and Futures Commission (SFC) will also impose a fine of HK$119 million ($15.2 million) against UBS for its role as a sponsor of certain initial public offerings listed on the Hong Kong Stock Exchange.

That fine, however, is small change compared to the multi-million-dollar fees it will miss out from some of the blockbuster IPOs expected in Hong Kong over the next 18 months, including those of China Tower, Xiaomi and Douyu. 

UBS said it would appeal against the decision. 

One source familiar with UBS said the bank would still be able to assist with IPOs in a role other than sponsor, but admitted this would be of little help to the bank in recovering potential losses for missing the top role in upcoming deals.  

"Investment banks are increasingly competing for the sponsor role [against other junior roles] because it guarantees the maximum fee," the source said. "A sponsor controls every aspect of an IPO from pricing to allocation. It also maintains the closest relationship with senior management, and therefore gets a higher chance of conducting follow-up businesses with the company after the IPO." 

Sources have told FinanceAsia that IPO sponsors typically share over 80% of the underwriting fees in an IPO. 

UBS has been turning its focus away from sponsoring IPOs in Hong Kong since the SFC started investigating it in October 2016. The Swiss bank has not sponsored any IPO on a sole basis since then.  

Everbright Securities, ZhongAn Insurance and Razer were the only Hong Kong IPOs UBS has co-sponsored since the investigation began. UBS is not slated to sponsor any IPO among the list of companies that have filed a listing application, according to Hong Kong Exchanges & Clearing (HKEx), the city's stock exchange operator. 

The source said there was no immediate plan to reduce headcount at UBS in the face of the expected reduction in IPO business. 


What remains unclear is the nature of the penalty against UBS, which was first revealed in UBS's 2017 annual report, published on Friday. The SFC has made no announcement on the ban.

That is against SFC's usual practice of announcing penalties and fines publicly on its website. Since 2015, the securities regulator has publicised the names of IPO sponsors and listing applicants of rejected applications in what is known as the "name and shame" regime. 

One corporate finance lawyer told FinanceAsia this suggested the sanction could be an internal penalty under SFC rules for licensed entities. 

UBS has not explained the details behind the ban, nor said which IPO it was penalised for. The SFC filed a lawsuit last year against UBS and Standard Chartered for their joint sponsor roles in the IPO of China Forestry, but the case was dropped in October. 

China Forestry raised $216 million from an IPO in 2009, but its shares have been suspended from trading since January 2011 after its auditors found accounting irregularities and falsified transactions. The company has been delisted and is now in the process of liquidation. 

The corporate lawyer, speaking on condition of anonymity due to the sensitive nature of the case, said it was possible for the SFC to penalise UBS on the China Forestry case despite dropping the lawsuit. This is because UBS is a licensed entity under the SFC. 

The lawyer explained that the lawsuit was filed as a public civil case, demanding UBS compensate China Forestry shareholders who suffered losses as a result of the IPO. The new ban could be an internal reprimand against UBS for failing to comply with certain rules under the Securities and Futures Ordinance. 

In the case of China Forestry, the SFC had sued UBS and Standard Chartered for "contraventions of market misconduct" by referring to section 213 of the Securities and Futures Ordinance.  

However, the lawyer said it was impossible to tell how serious the violations were since section 213 covers a wide range of actions.  

Under section 213, IPO sponsors could be penalised for anything from minor misconduct, such as failing to comply with a due diligence checklist during the IPO process, to serious issues like corporate fraud or falsified disclosure of information.


In any case, the ban underlines SFC's effort to increase scrutiny on IPO sponsors in order to ensure the quality of newly-listed companies and protect investors. 

SFC chief Thomas Atkinson has promised he will take bold action against IPO sponsors that put in sub-standard sponsor work. This comes at a time when banks are putting less resources into due diligence, since listing candidates now pay lower advisory fees compared to a few years ago. 

In recent years, the increasing number of boutique investment banks and Chinese brokerages also forced bulge-bracket banks to lower their demand on sponsor fees in order to secure deals. 

The securities regulator said it was investigating in as many as 15 IPO sponsor cases last year. 

SFC is the gatekeeper for regulatory compliance in Hong Kong's IPO market, and its role is even more important as the city is set to accept the so-called dual-class share strcuture, which will allow companies to conduct IPOs with unequal voting rights. 

The move raised concern over corporate governance issues and fears of undermining investor protection, although HKEx has said it will offer more choices to investors and allow Hong Kong to host more IPOs of new economy companies and technology-startups. 

HKEx chief Charles Li said the exchange could start accepting applications for dual-class share companies in early-June.   

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