UBS’s pain will be Hong Kong’s gain

Hong Kong has used UBS Group AG to send a harsh message to investment banks: Take your job as a gateway to initial public offerings seriously. With deals starting to boom again and the city’s exchange planning to allow dual-class shares, regulators are right to adopt a tougher stance.
The Securities and Futures Commission suspended UBS from sponsoring Hong Kong offerings for 18 months and handed it a HK$119 million ($15.2 million) fine, the Swiss group said in its annual report recently. UBS is appealing the ruling, which related to a particular IPO that it didn’t identify.
Many banks in the go-go years were willing to relax due diligence standards to win business, so UBS can feel aggrieved to have been singled out. Still, the urgency to act is demonstrated by a Hong Kong IPO pipeline that could see the city’s flotations rival their 2010 record this year.
At first glance, UBS has lost little. It will still be able to act as an underwriter, which generates far more in fees than sponsoring IPOs. The sponsor is the advising bank that guarantees the contents of a prospectus and essentially signs off on the listing.
But landing the role of sponsor is generally a path for banks to take the job of lead underwriter, also known as joint global coordinator, so the SFC ban will indirectly hurt.
The punishment had been awaited. UBS and Standard Chartered Plc disclosed in 2016 that they faced potential regulatory action for their work on China Forestry Holdings Co., a logging company that went public in 2009 and subsequently collapsed after financial irregularities were discovered.
In January last year, the SFC filed a writ against the two banks and China Forestry’s auditor, KPMG LLP. UBS global investment banking head Andrea Orcel said last year that the bank, which has one of Asia’s top equities platforms, had stopped pitching to be a sponsor because the risk just wasn’t worth it. Standard Chartered exited a large chunk of the equities business in 2015.
UBS is unlikely to be the last bank to face sanctions, particularly for deals before 2013, when the SFC made sponsors criminally liable for false statements in IPO documents. In October, the securities regulator said it was investigating 15 financial firms whose failure to check on customers and revenue, among other things, had lost investors money.
The commission has reason to brandish a big stick. In a few months, Hong Kong will allow companies with multiple share classes to list, part of a package of measures that may be the biggest change to the exchange’s listing rules since 1993. The change, prompted partly by Hong Kong losing out to New York on Alibaba Group Holding Ltd.’s record IPO in 2014, was opposed by the SFC, which expressed concern that shareholders would be treated unfairly.
Most abuses tend to happen when markets are hot and investors are focused on returns rather than risk. Hong Kong is looking at another bumper year, with potential major listings including Chinese smartphone maker Xiaomi Corp. and Alibaba affiliate Ant Financial.
In a market that lacks class action recourse and where Chinese state-owned companies can pay scant regard to minority shareholders, another round of excess could deal a severe blow to Hong Kong’s reputation for investor protection.
Investment bankers may chafe, but the SFC’s tightened grip is needed.

—Bloomberg

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter