The decision by Hong Kong’s securities watchdog to fine and ban UBS Group AG temporarily from serving as a sponsor for new listings on the city's bourse could have repercussions for other banks active in what is expected to be the world's biggest IPO market in 2018 as regulatory scrutiny tightens.
The UBS penalty handed down by the Hong Kong Securities and Futures Commission, or SFC, could be the beginning of a clampdown on IPO misconduct. At a March 14 forum in Hong Kong, Thomas Atkinson, the SFC's head of enforcement, said some investment banks have been "extremely reckless" when helping clients prepare prospectuses and other services when serving as IPO sponsors, Bloomberg News reported. The watchdog is expected to announce later this year the results of other investigations into 15 entities, Atkinson said.
At the same forum, Julia Leung, the SFC's deputy CEO, said the regulator recently reviewed the work of 31 sponsors from 2013 to 2017 and found deficiencies in their work, particularly with regard to due diligence, such as verifying a client's financial disclosures.
UBS, in its 2017 annual report released March 9, revealed that the SFC fined local unit UBS Securities Hong Kong Ltd HK$119 million and plans to suspend its sponsor license for 18 months following its investigations into the bank's work in helping clients come to market via IPOs.
The annual report provided no further information about the investigation or how the company allegedly erred, but it did state that UBS intends to appeal the suspension.
'There is much it can contribute'
Investment banks have good reason to want a piece of Hong Kong's IPO action. This year, it is expected to become the world's largest IPO destination in terms of funds raised, according to PricewaterhouseCoopers. PwC predicts that Hong Kong IPOs will raise between HK$200 billion and HK$250 billion in 2018, up from HK$128.2 billion in 2017, which put it in third place after New York and Shanghai.
UBS could still land underwriting roles in Hong Kong IPOs, potentially generating greater fees than sponsor roles. In Hong Kong, sponsors, which help guide clients through an IPO process and are responsible for the integrity of disclosures, charge a fixed fee for that service, which could be as little as HK$5 million. Underwriters, which help companies sell shares, can receive fees of around 1.1% of funds raised, according to a bank analyst at Morningstar.
A Hong Kong-based source from a European investment bank believes the Swiss bank will continue landing IPO business because issuers will want to develop relationships with UBS, which is one of Europe's largest banking groups, recording CHF939.54 billion of assets as at end-2017. Globally, equity capital markets, which includes IPO services, generated CHF1.05 billion of the investment banking business's total CHF7.65 billion of operating income in 2017.
"For finance-related listings, I would imagine applicants will still want the bank to participate in the syndicate in some capacity so that it can benefit from other positions in deals down the road," he said.
A company source who spoke on condition of anonymity also noted: "The IPO business is operational and can still participate [in a listing] as a joint global coordinator. ... It can still organize and distribute rights and [share] blocks. ... There is much it can contribute."
Change is afoot at UBS nonetheless. On March 15, the bank told staff in an internal memo obtained by S&P Global Market Intelligence that it is merging its Asia-Pacific teams that run equity and bond deals to "optimize" its business. It did not say whether the move is related to the suspension.
Reputational risks
Without the ability to serve as a sponsor, an investment bank might be ruled out of working as a lead underwriter or joint global coordinator, warned Stephen Chan, partner for corporate and investment practice at law firm Dechert in Hong Kong.
"You also potentially can lose the opportunity to pitch to clients," Chan said.
Those challenges are not lost on the industry, which has known of the suspension for some time, and bankers at UBS "are pretty much resigned" to it, said a source from the compliance division of a global investment bank in Hong Kong.
"They know new clients won't go to them [as a sponsor] anymore, even though they are still in business while awaiting an appeals process, because it would be a chore for any company to have to change its sponsor midway through a listing exercise," the source said.
Other banks have found ways to circumvent suspensions. For instance, HSBC Holdings PLC's private banking operations in Hong Kong, as a result of a 2015 misconduct probe that led to a suspension and partial suspension of two licenses in 2017, moved that business to another legal entity to avoid any major fallout from the ruling.
Given the potential reputational risk, Psyche Tai, head of the Hong Kong operations of law firm Norton Rose Fulbright, believes the UBS scrutiny will make other principal sponsors more cautious.
"It's a lesson to all sponsors to ensure they are up to the [regulatory] standard required," Tai said.
