The overarching theme when you cross-examine the responses
is one of in-house teams struggling to keep up with their
bank's growth in the region. How far would you agree with
Paul Browne: The Asian market has grown a
lot in recent years with an increase in the complexity of
financial products, as well as investors becoming more
sophisticated. That's naturally led to a higher workload for
in-house teams and a general increase in the need for
expertise. So it's not surprising that banks are finding in
certain areas that they are pushed. It varies from house to
house. Some have been more pro-active in terms of their
investment in this than others.
Do you think it's a case of the legal teams trying to keep
up with the front office, or the disparate nature of the
PB: That's a good question. As you say,
this is a disparate region. I had a meeting with a group of
in-house lawyers today that reflected that: there's a small
group of them, and they are covering the whole Asia-pacific
region, excluding Japan. It's inevitably going to be difficult
for them, especially given that the legal regimes are so
|"Be careful what you
wish for. Those that have experience of uniform,
pan-European legislation know how difficult it is to
adapt that to local markets"
Charles Mayo: In the equity capital markets
it's not unusual to have an offshore holding company, so you're
inherently dealing with at least two legal systems. If you
contrast that with Europe, and its EU-wide directives, there's
a huge difference in Asia, especially when taking into account
the differing market practices in each jurisdiction.
The responses suggested that a European-style, Asia-wide
directive is unlikely for the time being. Do you think it's an
achievable goal in a region with such disparate legal
CM: Be careful what you wish for. Those
that have experience of uniform, pan-European legislation know
how difficult it is to adapt that standard approach to local
markets. It can produce a one-size-fits-all, expensive,
cumbersome form of regulation. There will be a convergence in
Asia of best practice over time, but the question for the banks
is whether that will improve or lower overall standards.
PB: It's hard to see there being an
overarching pan-Asian directive in the foreseeable future.
However Asian jurisdictions are striving, with various degrees
of success, to achieve international standards, so
harmonisation is unlikely to be achieved on an ad hoc
Eighty-three percent worried that their in-house teams
could fall into market practice. Does that surprise you?
PB: Many regimes in Asia, China for
instance, just aren't as mature as the US or Europe. There will
be a concern that international standards aren't filtering
through to Asia.
How do you think law firms can ease this fear?
CM: We need to provide perspective between
international best practice and local market practice. But on a
note of caution, one shouldn't assume that international best
practices are always stricter than local. Hong Kong, for
example, is proposing quarterly financial reporting on a
revenue and a balance sheet basis at a level of detail that's
far more demanding than a UK main market company would be used
What is your view on whose job it is to improve retail
PB: It is the role of regulators to ensure
any documentation being distributed to investors complies with
certain minimum standards, but to simply say it's the role of
the regulators isn't sufficient. Banks need to take ownership
of what they are selling and accept responsibility for it.
Increasingly we should be viewing this as something that's a
global problem and imposing a global standard.
CM: A bank that relies on a regulator to
explain the risks will find itself justifying its conduct to
the same regulator when something goes wrong. At that point,
the regulator's not going to be very sympathetic.
Almost a quarter of respondents argued it was the job of
the regulators to do this. Do you agree? Or would you say this
is passing the buck?
PB: I think it is dangerous to rely on the
regulators without product providers and distributors taking
genuine ownership of their role in the selling of those
What role can external counsel play?
PB: As a minimum, there are two or three
key things we can do. First, while it may be self-evident, we
need to draft documentation clearly, and setting out all the
risks for the investor as clearly as possible. Outside of that,
a key element is our role in educating the bank in the risks
associated with the whole marketing and sales process, not just
on the documentation side. For example, ensuring mechanisms are
in place so that the sales guy doesn't go off and spin a good
story to help him sell the product. We need to assist the
in-house at banks to help them implement these procedures and
manage their marketing process.
CM: On the other hand, you can get to an
extreme point where an abundance of caution makes people hide
behind too many risk factors, so investors can't distinguish
between general risks and real risks.
|"The main driver for
covenant-lite loans has fallen away"
PB: Language is a classic problem. You may
be documenting the deal in English, but is it really reasonable
that you should explain it to an investor in English, or should
you be explaining it in the local language? And with the
contractual documentation more emphasis must be placed on
investors being given adequate time to review the terms of the
deal. These are the sort of processes and protections that need
to be put in place. I'd be worried if they aren't.
Within structured products, 68% of respondents thought that
Asia was still following products and trends in Europe and the
This surprised me. Unquestionably, Asia has become more and
more of an innovator. For a number of years now, I have had
regular calls with colleagues in London to discuss our global
structured products practice and a few years ago I felt Asia
was lagging behind in terms of innovation, but now when I have
these calls I don't feel that at all. The fact that almost 70%
of respondents said Asia was still a follower was
China topped every poll both in opportunities (M&A,
specifically) and fears. How have you found dealing with the
country and its regulators over the last two or three
The regulators are definitely trying to grasp these new
products. They're struggling with some, and trying to place
them in the context of their own legal regime. But there has
been concerted effort, and that's one of things that makes
China so exciting. It's harsh to accuse the regulators of
inaction. Regulatory measures come out almost every day. It's
fast paced. However, for China to be at the forefront of
international finance there needs to be an increase in
international investor confidence. There are still big
uncertainties with China's legal system, and we can't get away
CM: On the equity side, it's slightly
different. Looking at the rise in the Shanghai stock market,
China is facing a conundrum: do you dampen that rise by
restricting investors from investing abroad, and by preventing
Chinese companies listing abroad, or do you stand it on its
head and allow more domestic Chinese to invest overseas and
more companies to list outside the PRC. There is a risk that
the question will only be answered when there is a large
Have you come across the so-called invisible $1 billion
threshold for PRC companies wishing to list in Hong Kong?
CM: Broadly speaking, if you look at the
PRC companies that have listed, they do follow that pattern
a Shanghai listing first, unless they have historical
factors or an overseas holding company. Which takes me back to
my previous point: does this help or hinder?
Do you think that liberal lending techniques like
covenant-lite loans can flourish in Asia as they did in the US
and UK before the markets' downturn?
PB: The main driver for covenant-lite loans
has fallen away. Although it's too early to predict how things
will go after the credit crunch, if you had to put me in one
camp I think I would tend towards thinking that covenant-lite
loans are unlikely to flourish in the foreseeable future.
There was quite a split between respondents regarding
disclosure requirements of Chinese companies. Quite a few
complained that disclosure was largely ignored. How do you feel
CM: You have to put the answer in the
context of the pace of change and the rapid development of
regulations in China. The goal posts are moving around the
field the whole time.
PB: Inevitably there has to be an education
process for Chinese companies as to the level of disclosure
that's expected by international investors. When putting
together an offer document, senior management needs to
understand its purpose and make sure it is a fair reflection of
the company itself. The market has developed very quickly,
there has been a clamour for China exposure; there has been
less focus on disclosure than there should be, so it is not at
all surprising that education is required.
There was a mixture of responses as to what obstacles banks
faced or expected to face when conducting M&A deals. What
do you see as the greatest block, and why?
CM: I was surprised that people don't see
management culture as one of the most important obstacles to
M&A. That's either because it isn't, or because it's a fact
of life and people take it for granted.
Any other thoughts?
CM: Underlying all these questions is a
challenge for Hong Kong, which is to maintain high standards of
regulation while keeping its competitiveness among other Asian
markets. And the answers as well as the pace of change indicate
that the dilemma is becoming more acute.
PB: Within structured products, Asia needs
to stay plugged into Europe and the US and develop alongside
these markets, in particular Europe. There's a challenge within
the industry here to ensure that it puts together initiatives
in conjunction with what's happening globally, so structured
products are co-ordinated on an industry, global basis as much
as possible. That's obviously easier said than done, but as a
general principle I hope structured products will develop here
as they have in Europe and critically in conjunction with the
developments in other mature markets.