Why keeping it legal matters

Clifford Chance's Martin Rogers offers advice on how to surf the region's regulatory waves.
When the topic ôregulatory environmentö is raised, many bankers go for their second cup of coffee. Fear of more calls for triplication of your work spring to mind, or worse, the notion of reading rules that have a love affair with roman numerals followed by a, b, c points.

But the regulators, particularly in Asia, have been known to shut down whole departments of international banks for not following the rules, however murky they often are. So itÆs kind of like smiling at the immigration official when crossing a border û you want to be nice to these people who wield great power.

Martin Rogers, head of Asia litigation and dispute resolution at Clifford Chance and co-head of the firmÆs Asia Regulatory Group, recently offered up advice on wading through the regionÆs regulatory system.

FinanceAsia: What are some of the key regulatory issues that financial institutions need to be aware of?

Martin Rogers: First, itÆs important to do continuous regulatory forecasting. Obviously itÆs not easy to predict what regulators will do, in part because many regulators are very event-driven, but nonetheless itÆs important to try to see whatÆs on the horizon.

And how do you see whatÆs on the horizon, short of using a crystal ball?

I regularly meet with my counterparts in the US and Europe. Because as you know regulatory developments are quite the opposite of, say, the last financial crisis, which started in Asia and then moved west. Regulatory developments tend to start in the US, move to Europe and then end up, in a diluted form, in Asia. So itÆs important to track developments in the US and Europe.

But there are other things you can do: you can commission market surveys, talk to industry groups, and perhaps most importantly, engage in dialogue with the regulators themselves.

What else should banks do to comply with regulations, which at least here in Asia, can be at times unpredictable?

You need to take a risk-weighted approach and prioritise high-risk areas. Now donÆt take this wrong, but you canÆt entirely eliminate risk, so therefore you must look at whatÆs the most risky. Obviously such as issues as market abuse û offering false or misleading public information, market manipulation, insider dealing û are examples of risky behaviour. But banks need to be aware of more subtle issues, such as conflicts of interests. ThereÆs increased visibility on the potential conflict of financial institutions between roles as investor and financial adviser/underwriter. Consider the ASIC litigation against Citigroup. I don't see a valid basis for that specific piece of litigation. ASIC should in my view have dealt with it by industry guidance to everyone. But it illustrates the point that conflict issues are now important regulatory concerns.

Banks also need to take closer looks at structured products, which are increasingly on offer to retail investors who may not be as market-savvy as financial institutions. And they need to keep an eye on politically exposed transactions. The Thaksin family-Shin Corp shares deal is a perfect example of this.

At the same time you shouldnÆt forget the basics. Banks have got to make sure that key operational systems keep working properly and where necessary have fail-safes. What if an electronic feed into a disclosure of interest reporting system has a glitch, or a printer generating documentation for clients malfunctions? In Hong Kong, these sorts of breaches can give rise to strict liability criminal fines. And even small fines can have reporting and licensing issues for associates elsewhere in Asia (eg Taiwan) or the US.

Who should be in charge of this in a firm?

Compliance and corporate governance needs to be senior-management driven. The most painful way for a bank to learn this, unfortunately, is to go through a major problem. But these days senior management get the point and are taking it seriously.

Institutions need to take a more pro-active approach, partnering if you will, with regulators. Regulators here donÆt issue too many ôgrey areaö opinions, so we advise clients to go out and talk to regulators more. Bring up issues that concern them. That goes hand-in-hand with the next point, which is that banks should enhance their ôearly warning radarö systems. What I mean by that is that what might appear to be a routine letter or statement, could actually be an early warning signal about a bigger issue. Korean and Indian regulators will put you out of business if you donÆt respond û even Australia can be aggressive.

But thatÆs hardly true in Hong Kong...

Singapore and Hong Kong are looking to attract institutional investors, so thereÆs a sort of arbitrage between the two as to who can make themselves more attractive...

But no matter where you are, if there is a problem, bankers should be more pro-active and manage it. For example, if youÆve done something the regulators have deemed wrong, donÆt deny it. ItÆs better to say, ôYes we realise we made a mistake there, but weÆve addressed the problem, spent the money and fixed this issueà

Would that really appease the regulators? Seems admitting guilt is a dangerous route to takeà

You're right. Regulators probably will impose a penalty. But if there's full co-operation and pro-activity, the penalty should be proportionate. And you really don't want to be in a scenario where the regulator discovers you have mislead it, or even held something back. That's when you move into the territory of losing licences.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media