A series of financial misconduct cases at Asia-Pacific banks have prompted regulators in Hong Kong and Australia to enhance accountability for senior managers at banks and other financial companies, a trend that is set to permeate the region.
Amid cases ranging from the alleged misappropriation of funds from Malaysian wealth fund 1MDB to an Australian bank putting client money into risky investments without their permission, authorities in some of the region's largest financial centers are bolstering senior management accountability to limit such practices in the future. Hong Kong and Australia have taken concrete steps, and Singapore and Malaysia are considering following suit.
This follows the introduction of the Senior Managers and Certification Regime in the U.K. in 2016, which made executives personally accountable for regulatory breaches, following large-scale taxpayer bailouts during the global financial crisis.
'Manager-in-charge'
Accountability is a "huge area of focus," according to William Hallatt, head of financial services regulatory for Asia at professional services firm Herbert Smith Freehills.
"Other than the U.K., Asia is leading in senior management accountability change," he told S&P Global Market Intelligence. "The focus is shifting from the burden being fully placed on the firm itself, to being placed on the individual. That is going to change the way in which firms are held to account over the next few years."
Hong Kong's Securities and Futures Commission, or SFC, fully implemented its "manager-in-charge" regime in October 2017, which will clarify which individuals should be regarded as senior managers at regulated entities, and heighten awareness of their accountability and potential liabilities.
It does not introduce specific new sanctions for senior managers, and the regulator will continue to rely on its existing powers to discipline those found guilty of misconduct. But the SFC's executive director of enforcement, Thomas Atkinson, says the regulator plans to "vigorously exercise its powers" to hold individuals responsible for their companies' failings.
And indeed, the regular has stepped up enforcement actions against specific managers.
In 2016 it imposed fines or other penalties on 85 individuals, a 55% increase from 2015, according to a study by law firm Freshfields Bruckhaus Deringer. Over the same period, the number of SFC enforcement actions against financial institutions and companies dropped 24%. This trend is consistent with "repeated reminders" from Hong Kong regulators that management of financial companies must instill the right culture and lead with an appropriate "tone," or face being held personally responsible for any noncompliance by their companies, Freshfields said.
Hong Kong's banking regulator, the Hong Kong Monetary Authority, or HKMA, also published new guidance on senior management accountability in October 2017. Registered institutions are required to identify individuals who are principally responsible for particular functions of a regulated activity; the measures will mean more people are subject to regulatory scrutiny, and will help the HKMA quickly identify individuals responsible in any instance of regulatory breach.
Discouraging misconduct
Hong Kong's moves come amid a number of high-profile misconduct cases around the Asia-Pacific region.
The ongoing scandal surrounding Malaysia's sovereign wealth fund, 1MDB, has seen the country's prime minister accused of siphoning hundreds of millions of dollars into his personal bank accounts. Elsewhere, Commonwealth Bank of Australia's wealth managers were accused of switching clients' investments to high-risk products without their consent, while the bank's life insurance arm has been found guilty of using outdated information when rejecting claims.
Other Australian banks have fallen foul of regulators in recent years after investigations into misdeeds ranging from misselling products to foreign exchange market rigging, including Australia & New Zealand Banking Group Ltd. and Macquarie Bank Ltd.
In May 2017, Australia's government detailed its new Banking Executive Accountability Regime, slated to come into effect on July 1, which will give regulators more powers to remove executives from institutions and impose penalties of up to A$200 million on financial companies that do not appropriately monitor the suitability of their executives to hold senior positions. It will also ensure that up to 40% of senior bank executives' remuneration is deferred for a minimum period of four years if they fail in their corporate governance duties.
The country also launched a royal commission — a public inquiry governed by an act of parliament — into the banking sector in November 2017. It will investigate misconduct by financial companies and has broad powers including summoning witnesses and issuing search warrants. It can make recommendations to the government including changing laws and regulations.
Singapore and Malaysia are also considering introducing senior management accountability rules, according to Niall Coburn, a regulatory intelligence expert for Asia at Thomson Reuters.
"The major theme that I see running through Asia is placing a high value of ethics in the banks," he said in an interview. "Banks will be looking at their longevity and their reputation rather than just making large amounts of money."
A continuing challenge
Enforcing accountability regimes will be a continuing challenge for regulators, according to Philippa Allen, CEO of ComplianceAsia, which provides compliance advice to financial industry participants.
Regulators are increasingly saying they will inspect companies' operations and crack down if they are not following the rules, she said. In Hong Kong, there is a raid on a company where individuals are behaving inappropriately "every week," she added.
"Singapore has started publishing its enforcement actions; it didn't use to do that," she said. "Australia has the royal commission on banking. There's been a lot of work being done to probe into the activities of the financial industry in Asia."
Coburn added that cases of misconduct will likely pop up in 2018, especially among banks in China, Hong Kong, Malaysia and Indonesia, given that agencies in these countries are cracking down on questionable IPOs and on companies where investors have lost money. Investors care a lot about management accountability, as they want management "on the hook" for compliance failures, he said.
Hallatt said some investigations have commenced under new accountability rules in Asia, and noted that potential fines are high — as will be the impact on profits at affected companies. When the first charges are seen, "they will impact individual and corporate reputations equally, and that will likely have an impact on the bottom line," he said.
