As international banks' presence grows across Asia's
developing markets, their in-house teams are becoming
stretched. Up to 15 disparate markets need their own compliance
officers. But they rarely get it. And general counsels are
worried that their in-house team will fall into local market
practice in Asian markets.
Meanwhile, as front offices are expanding, along with the
complexity of structured products, banks' legal teams cannot
This year, IFLR has undertaken its first Asian
Bankers' Counsel Poll. Following the success of the magazine's
global poll in March, we decided to gauge the fears and
opinions of Asian counsel. The poll was designed by general
counsel at the world's largest banks to survey their peers and
was conducted on an anonymous basis to coax candid opinions out
of counsel on particularly sensitive subjects, at an especially
The poll was wide ranging, and covered retail investors,
hedge fund regulation and M&A work. But one strong theme
emerged: Asia is not immune to the market ruptures of the US
and Europe, and bankers' counsel are ill prepared for risk,
both from market volatility and local market corruption.
Local market fears
"Corruption never has been compulsory," Anthony Eden, a
former British prime minister, once said: Maybe so, but it's
becoming harder to avoid in Asia, however good the
"It doesn't matter whether you call it peer pressure or
market pressure, there is a huge fear that our team will fall
into local market practice," says one bank's general
|Which country is the biggest
cause for concern?
That respondent isn't alone: a worrying 83% suspect that
their team will fall into local habits in some Asian
jurisdictions. This is not to presume that local market
practice is a byword for corruption, but it's surprising how
many respondents took it to mean precisely that.
A common pitfall is overlooking due diligence issues at
Chinese companies. "There is a fear that our team will approve
substandard documentation," says one respondent. This won't
change while markets remain buoyant. Market reform is
traditionally driven by either regulators or investors and
neither seems willing at the moment, especially investors.
Aside from the small portion that wants to sell on their
Chinese company shares internationally, with all the
transparency it brings, there is little demand.
The figure of 83% is shocking, even when taking into account
the nature of some of the markets. "I'm amazed at this.
Upholding the standards of the court is, and has always been a
lawyer's priority. The idea of a lawyer being corrupt is
repugnant to me," says one senior counsel. The concept may be a
grim one, but it is a real danger for most in-house.
China causes most concern, with 44% of respondents citing it
as their corruption hot spot. This is hoped to improve; as
lawyers return to China, having been trained in international
best practices abroad, often in Hong Kong, standards are rising
slowly. But the country's historic relationship with corruption
will not fade overnight.
Indonesia is the second largest are of concern with 22%,
while India, Korea and Taiwan all received roughly equal lower
Trusting the middle man
It's not just the bank's in-house team that senior counsel
worry about local intermediaries provoke fear too.
Notably, 44% of respondents complained about a lack of
knowledge and experience among local firms, citing a poor grasp
on foreign regulations. The concern of corrupt local firms
looms large too, with 33% highlighting them as a particularly
acute worry. But it is nearly impossible to keep checks on how
local advisors are getting results with no representative in
that jurisdiction. Know Your Client checks are also a prominent
gripe, with 23% complaining about how local intermediaries
conduct their suitability analysis.
"Some of these markets won't be developed in the foreseeable
future. If you have local counsel with people trained
domestically, there is a threat you're in-house team will be
forced into that," says one senior counsel.
|What are your biggest fears when
dealing with local intermediaries in Asia?
|Are you worried that your
in-house team could fall into local market practice in
certain Asian jurisdictions?
|Compliance is needed in 15
different jurisdictions. Is your team stretched?
Banks' solutions are expensive, too. Most respondents said
that in particularly precarious markets, they ask an
international firm with strong links to the jurisdiction first,
and employ the firms' local partners afterwards. "This is
tedious, and incredibly expensive, but it's unavoidable," said
one respondent. The legal framework is to blame. One general
counsel said that he never uses international firms in
Singapore, for instance, because he knew the laws were well
developed and transparent: "When you juxtapose places like Hong
Kong and Singapore with China, it's a completely different
At 86%, almost all respondents complained that their
in-house team was stretched. Asia's disparate nature plays a
large part in this. With compliance needed in 15 jurisdictions
amongst the larger banks, and deal flow still buoyant, teams
are finding it hard to manage the risk. One respondent insisted
that the bank's legal and compliance teams were growing, though
not at the same rate.
An external counsel sympathises: "There's a lag from when
the business develops to when the team will catch up. Orders
come from the front office with scant regard for how in-house
teams will keep up with the risks that are being created."
Possible solutions are scarce too. Banks are happy to spend the
money on increasing their in-house team, said one general
counsel, but there is a dearth of legal talent in Asia.
And international firms can do little to help; in some
countries, China, India, as prime examples, they are not
allowed to act on local aspects while banks are reluctant to
spend on piecemeal external counsel for compliance. Secondments
should ease the burden, but firms in Asia with talent are
reluctant to let them go, even temporarily.
The price for this legal lag could be high. When asked what
the three key risks that investment banks faced in Asia, legal
risk was top with 23% closely followed by reputation risk and
market volatility. While this could be attributed in part to a
mild case of self-importance among some general counsel it is
certainly a worry, and with the US slowdown forcing emerging
markets in Asia to take the strain of global investors, these
risks will not diminish.
While in-house teams struggle to keep up with compliance and
international best practices another danger persists, and all
respondents agree on this: 100% are worried about lack of
knowledge among retail investors in Asia. The summer's credit
market downturn may have stifled investors' appetite for yield
elsewhere, but Asia is still thought to be one step removed
from the US and Europe. This is worrying, especially as
structures are getting more complex in Asia.
The investor base is widening and in Hong Kong there is a
growing culture of gambling on products from investors with
only rudimentary knowledge. Although 100% is a worrying figure,
it is also reassuring. With the retail markets growing
furiously in Hong Kong and Singapore especially, many in-house
and private practice lawyers are struggling with the
increasingly complex structures. "Anyone saying they were not
worried about the knowledge of the man on the street would be
completely misguided," said one respondent. Thankfully no one
"A lot of Hong Kong investors buy into a product because it
is popular. But that doesn't reflect their understanding in the
company that they're going to invest in. There's a lot of
liquidity, a lot of hungry issuers, but very little knowledge.
We run the risk of paying the price for that."
Interestingly, 44% feel that both their in-house teams and
external counsel were doing enough to raise awareness among
investors. This is surprising. Considering everyone feared a
lack of knowledge on the part of retail, and to a lesser
extent, institutional investors, it seems disingenuous for
almost half of them to feel they've done enough. Clearly, the
buck is being passed. 23% agreed banks and law firms were not
doing enough, but added that it was the jobs of the regulators
to do so. "That's 23% too many. It is not the job of the
regulators, which do try and should be applauded, it's the job
of the sellers and the investors," says one external
|Hedge fund regulation
Good intentions, little action
Seventy-three percent of banker's counsel
surveyed think there are problems with hedge fund
regulation in Hong Kong
The main source of angst is the licensing
requirements for fund managers. Over the last two years
complaints have arisen over the lengthy process
required for managers, who have been forced to take an
exam when applying for a licence. The Securities and
Futures Commission (SFC) has taken steps to simplify
this, announcing streamlining in June, with managers
that are already licensed in the US or UK, will be
While the approach to those already with licences
has been relaxed, the requirements haven't changed. And
the new, simplified exam for foreign managers hasn't
yet been drafted. "The SFC's intentions seem good, but
it's early days yet," said one general counsel.
On the face of it, licensing should not be much of a
burden for banks. But as international banks increase
their hedge fund groups in Asia, licensing is becoming
increasingly important for in-house counsel.
A worrying 66% of respondents thought that
regulators are looking to the banks to internally
regulate their hedge funds. But the alternative of the
SFC actually regulating the risk of the funds, not just
the licensing of them and their managers, has not been
welcomed. "We want the SFC as far away as possible,"
said one respondent. "If regulators want to start
regulating the amount of risk that managers take on, in
what is an unregulated fund, then that's a significant
|Do you think there are problems
with the Hong Kong system?
|Are the regulators looking to
the banks to internally regulate them?
Some complain that there is a distinct lack of knowledge
amongst the regulators as well. "We [the banks] are teaching
the regulators the rules. As products become more complex, we
have to show them the ropes," says one respondent. However,
general counsels are divided on how to improve the situation.
All they do know is that it isn't their job: "It's not fair to
rely on the banks and the lawyers in what is basically public
education," says one senior counsel. The question roused strong
feelings amongst structured products lawyers, who are watching
products' complexity increase, alongside investors' low-level
knowledge. "Retail investors should be forced to take classes.
I don't understand a lot of these products, so there's no way
they're going to," says one respondent.
Some bank's counsel proposed a regular public announcement,
to be carried out by each market's regulator, akin to the
Securities and Futures Commission's 10-episode radio series in
Hong Kong, warning investors of the risks involved in
structured products. Among other suggestions, one senior
counsel thought there were two simple solutions: clear
disclosure of risks in marketing material and careful selection
Oddly, the problem for bankers' counsel is the risk they
take in explaining the risks. Bankers educating investors could
face associated liability. The more a bank involves itself with
the investor, the more that unhappy investor can accuse it of
misselling should the product default. In the current credit
market, even in Asia, nothing is safe. "When people start
losing money all sorts of things happen. Investors have denied
placing orders with banks; some, with a firm grasp of English
have denied being able to understand the salesperson at the
time, when of course they did," says one in-house counsel.
A vocal minority insisted that banks have a responsibility,
being the only points of direct contact with customers, or at
least distributors. But at the moment they rely too heavily on
front office staff, often with little investment
In terms of innovation, 68% agreed that the region was still
following in the footsteps of the US and Europe, when it came
to structured products. The remaining 32% claimed either that
Asia had unique needs, or products needed to be tailored to a
far wider investor base. Others claim that "there is no reason
why Asia cannot be an innovator."
Should another Asian financial crisis strike, banks will
want to be as protected from investors as possible. But in the
meantime, retail investors especially won't learn anything if
they are kept at arm's length. "It's not that banks aren't
focused on this, its knowing what the hell they can do about
it," said one in-house lawyer.
Banks will need a plan soon. The question "what kind of
disputes do you face, or expect to face?" provoked answers that
re-enforce in-house teams' fear of increasingly complex
products. The response "structured products suitability
disputes" was a popular one among those polled. And they are
right to worry. If the Asian markets do start rupturing there
will be many suitability disputes, especially around
The key area that needs improvement, alongside the language
of documentation, is ensuring that pre-emptive measures are in
place for the time of sale. Institutions need a paper trail of
the advice they've given, as well as making sure that
disclaimers in contracts are flagged up for investors before
sale, not after. Anything less is dangerous.
But banks' counsel face an uphill struggle. "They [in-house
teams] want box-ticking, but for all the legal niceties the
front office is at the coal face, and ultimately financial
institutions exist to make money. They have to take the risks,"
says one private practice lawyer.
The danger of regulatory action doesn't feature amongst
respondents' fears for litigation. This is surprising: in Hong
Kong, especially, the SFC has publicly denounced misselling,
and investors know this gives them leverage. In the last year,
banks have seen disgruntled investors either report them, or
threaten to report them to the SFC, on anything from misselling
to Know Your Client checks. Threatening banks with regulatory
action forces them to negotiate, and usually settle.
|Do you see Asia as an innovator
in structured products or simply following trends in
Europe and the US?
|Are you worried about a lack of
knowledge among retail investors involved in structured
products in Asia?
|Do you think that banks and
external counsel are doing enough to raise awareness
among investors of the risks?
But despite their lack of knowledge, retail investors are
not necessarily the biggest threat of litigation. There is a
subset of risk takers who also endanger financial institutions.
High-net-worth individuals and listed companies have more funds
with which to litigate, and they are willing to use them. Banks
in Asia worry about reputation risk, and investors know
The poll was conducted during a difficult period for
international banks. IFLR sent the questionnaires out
at the beginning of August, just days before the sub-prime
crisis sparked market turmoil in the US and Europe. While
debate still continues over whether the slump will reach Asia,
the downturn has coloured some responses to certain questions
asked in the poll.
Even after the summer's volatility, a surprising 57% of
respondents worried about the risks of covenant-lite loans in
Asia, suggesting that talk of the controversial structure's
demise was premature.
The form of lending with fewer or no maintenance covenants
so popular among banks leading up to the summer's crash has yet
to catch on in Asia, with 15% believing the question to be
void. They must hope so. "As a lawyer, taking a covenant-lite
approach seems antithetical to the whole risk management
procedure that we have to carry out."
Even so, a surprisingly high portion (60%) of respondents
didn't think that the risks of covenant-lite loans were more
pronounced in Asia. Much has been made of the more opaque
workings of certain Asian companies, raising fears that the
lack of early warning mechanisms in covenant-lite loans would
be a risk too far. Also, the less developed credit rating
agencies in Asia mean the inherent early warning system they
provide elsewhere is absent.
Some external counsel think that this is simplifying the
situation. "From our dealings, there are quite a few corporates
that have good relationships with the banks, which are prepared
to lend on these terms. The fact that people are talking about
it means there's hope, especially in Hong Kong," said one
Sixty-six per cent of respondents believed that a smoother
mechanism for dual listings would increase simultaneous A + H
share listings. And the need for a smoother system is needed
now more than ever, as H-share hopefuls are backed into a
corner. As the Shanghai market heats up, the central
authorities are keen to keep local companies at home, to soak
In April it emerged that Beijing had introduced an
unofficial policy banning mainland companies from issuing
shares in Hong Kong unless they planned to raise more than $1
billion or were willing to do a joint listing in the
Facing the prospect of fewer mainland listings, the Hong
Kong Stock Exchange is making efforts to be more geographically
inclusive: it has already amended its 2007-09 strategic plans
to include the rest of Asia, and marketing trips are being made
to unfamiliar places.
In absolute terms the Hong Kong listing market remains
healthy: "I'm still getting calls from banks wanting quotes for
initial public offerings. We're still turning many away," says
one external counsel.
But the restriction has had an inhibiting effect.
"Previously potential issuers were getting staffed up, with
banks and lawyers, then being turned away," says one in-house
counsel. This has changed. Not only are companies now
approaching the China Securities Regulatory Commission (CSRC)
before hiring underwriters and lawyers, but some aren't
approaching the regulators at all, and simply not pursuing an
No end in sight
The situation won't ease for a long time. The problem for
bankers' counsel in Asia is the concoction of rapidly growing
markets and underdeveloped regulatory frameworks. Nowhere else
in the world is there such growth, with such little clarity.
Some think that Asia needs an overarching, European style set
of directives. It is unlikely to get one.
Of the respondents polled, 93% thought an Asia directive was
distinctly unlikely. While there is more support for the
levelling of such inconsistent frameworks, the lack of
homogeneity amongst markets means that any unified reform is
unlikely. As Asian emerging markets modernise, they may well
use the opportunity to restructure their regulatory regimes in
line with more developed systems like Hong Kong and Singapore.
"But the impetus will still be through modernization, with
regulatory development as a sort of bonus, not a directive for
the sake of it," said one senior counsel.
With the often lumbering nature of the pan-European,
one-size-fits-all system as an example, some think that any
attempt to do so in Asia would result in disaster. One thing is
clear: banks' in-house teams need more protection from the
risks borne out of dealing with liquid, but infantile markets.
And as the complexity of structured products increases, they
may soon need protection from their own front office.
Striking fear in the heart
While in-house teams across the US and Europe
spent their summer frantically dealing with the credit
crunch, Asian general counsel had a more nagging,
long-term threat China. The spectre of the PRC
still casts a long shadow over the top bankers' counsel
in the region.
China strikes more fear into the hearts of Asian
general counsel than anywhere else. Whether from retail
investors' lack of knowledge, companies' lack of
honesty or law firms' lack of transparency, the PRC
Of the respondents to the poll, 29% cite Chinese
retail investors as the most risky, twice as much as
second-placed India and Indonesia. With so much private
wealth in the country, and an unprecedented willingness
to invest, this is a worry for general counsel.
The PRC has a unique problem too. While the complex,
and often legalese style of the banks' documentation is
difficult for retail investors to understand anyway,
the supply chain that operates across China, with
investment banks selling to PRC retail banks, which
will then sell to other banks in disparate regions,
means that the language is further distorted the
further away it gets from the source. "Regional
dialects differ hugely and we need to account for
that," says one respondent.
It's not just investors that are keeping bankers'
counsel up at night. Just under half of those polled
(45%) are not happy with the disclosure made by Chinese
companies, on issues not led by their bank, when
listing. While not a majority of respondents, 45% is a
worrying figure. And the responses are frank. Many
agreed that Chinese companies needed to start
understanding that disclosure should not be rushed
through, or worse, ignored. One respondent answered
that he was "never happy with any of their disclosure."
When asked what could be done to improve disclosure,
one equally irate general counsel replied: "Chinese
companies need to find some honesty."
This is worrying considering the importance of the
country for international banks, for both listings and
M&A. When asked which countries the respondents
viewed as primary growth markets for their bank's
M&A transactions group, China polled joint first
with India, getting 24% of the votes.
|Which country's retail
investors are you most concerned about?
||Are you happy with the
disclosure made by Chinese companies generally
(ie on issues not lead by your bank) when
|Would a smoother mechanism for
dual listing increase simultaneous A+H listings?
|How likely is the possibility of
European-style, overarching direction?
|Are you worried about
covenant-lite loans in Asia?
|If so, do you think the risks
are more pronounced in Asia than the US and Europe?
The IFLR Asian Bankers' Counsel Poll was put
together by a committee of leading senior in-house
counsel at some of the world's largest international
banks with an Asian presence. The committee, alongside
the IFLR editorial team, created a
questionnaire of the questions it most wanted to ask
After input from the project sponsors, Simmons &
Simmons, the questionnaire was sent to a hand-picked
list of 12 senior and general counsel at the biggest
international investment banks in Asia. These counsel
were deliberately selected as the figures with enough
responsibility, at large enough banks, to answer
questions on a pan-Asia basis.
All responses were anonymous, as were the follow-up
interviews conducted by the magazine. Respondents spoke
frankly about their biggest concerns, and filled in the
questionnaire with candour. Some of those polled passed
the questionnaire around their in-house team, garnering
more specialised answers to more niche topics.
The magazine followed up with telephone interviews
with some of the respondents. The quotes contained in
this report are from these respondents and the initial
committee of both in-house and external counsel that
helped to put the survey together.