The IFLR feature

Author: | Published: 1 Nov 2007
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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 keep up.

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 difficult time.

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 intentions.

"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 counsel.

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 votes.

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 game."

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.

Structured products

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 did.

"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 counsel.

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 exemplified.

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 change."

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 of distributors.

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 experience.

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 misselling.

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 this.


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 respondent.

Dual listings

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 up liquidity.

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 mainland.

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 overseas listing.

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.

China risk

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 causes concern.

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 listing?

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 its peers.

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.