The Securities and Futures Commission imposed a record high HK$1.29 billion (US$166 million) in fines last year, up 563 per cent from a year earlier as the regulator strove to improve the quality of new listings in the city, according to a study of international law firm Freshfields Bruckhaus Deringer.
Fines last year were 55 per cent higher than the previous four years’ worth of fines added together at HK$829.95 million, according to a report by Freshfields, which has produced it annually since 2014.
“The SFC’s approach is in line with international trends. Fines are a popular enforcement tool for financial regulators in Hong Kong, the US and the UK,” said Georgia Dawson, Freshfields’ Asia managing partner in an interview.
The SFC’s higher fines indicate that the regulator is trying to clean up malpractice in the city and raise the quality of the new listings. Hong Kong has been the top market for initial public offerings worldwide seven times in the past 11 years.
“The regulator continued to focus on fewer but higher-impact cases, and on prevention rather than cure. We do not expect this to change in the near-term,” Dawson said.
Among the HK$1.29 billion in fines, it handed out a combined HK$814 million in fines to five investment banks: UBS, Morgan Stanley, Merrill Lynch, Standard Chartered Bank and China Merchants Securities (HK) for the failures to carry out their duty to act as sponsors for IPOs a decade ago.
UBS ranked top on the list in terms of fines last year, including HK$375 million fine in March last year for sponsor failures in three IPOs and a separate HK$400 million fine in November for overcharging bond clients.
The bank in March last year was banned from being a sponsor for a year, but that was shortened to 10 months after a review by the SFC found the firm had improved. A UBS spokeswoman declined to comment further.
“Sponsors with a history of returned or rejected listing applications or non-compliance should expect closer scrutiny,” Freshfields’ report said. “Corporate misconduct and fraud will remain high on the regulator’s agenda. Expect enforcement activity against listed companies and their management to continue.”
Besides imposing fines on poorly performing sponsors, it sought more information from the issuers. Between June 2018 and June 2019, it directly intervened in a record 46 IPOs, compared with 32 cases a year earlier.
Christopher Cheung Wah-fung, a lawmaker for the financial services sector who is also the founder and chief executive of local brokerage Christfund Securities, supported the SFC’s imposition of hefty fines on sponsors who had failed to carry out their duties.
“Investment banks want to make money which may be why they bring some poor quality firms to market. If they know they will need to pay a high price for such malpractices, they will not do so,” Cheung said.
While the SFC’s fines hit a record high last year, they remain lower than penalties handed out by its peers in the US and Britain.
The UK’s Financial Conduct Authority imposed fines of around GBP392 million (US$504.7 million/HK$3.92 billion) last year and the US' Securities and Exchange Commission imposed disgorgement and penalties totalling US$4.3 billion (HK$33.4 billion) last year, according to their websites.
The SEC also said it returned roughly US$1.2 billion to harmed investors as a result of enforcement actions.
The system could also be improved, according to Cheung.
“Going forward, I would like to see the SFC let investors receive compensation from these fines. Right now, all fines go to the Hong Kong government's Treasury. The investors who suffered from these failed IPOs did not receive compensation,” Cheung added.
An SFC spokesman declined to comment on the report’s findings.
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