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UBS under Hong Kong IPO investigation

Hong Kong’s Securities and Futures Commission is investigating UBS for its handling of IPOs. Its licence could be at stake.

UBS’s third quarter results today, handy though they were with an 11% jump in pre-tax profit, came with an unpleasant surprise. 112 pages in to the financial report came the previously undisclosed revelation that the bank could lose its right to conduct corporate finance advisory services in Hong Kong, including IPOs.

The note, within the provisions and contingent liabilities section, says that Hong Kong’s Securities and Futures Commission “has been conducting investigations into UBS’s role as a sponsor of certain initial public offerings listed on the Hong Kong Stock Exchange.” UBS says it was informed in October that the SFC intends to commence action against the bank and some of its employees “with respect to sponsorship work in those offerings.”

It adds: “If such action is taken, there may be financial ramifications for UBS, including fines and restitution orders. Such action could also result in suspension of UBS’s ability to provide corporate finance advisory services in Hong Kong for a period of time.”

UBS said it had no further comment.

An SFC spokesman said: “The SFC confirms an investigation is underway into the role of UBS as a sponsor of certain IPOs listed on the Stock Exchange of Hong Kong.” It declined to say what or when the trades were.

Baring teeth

Hong Kong’s regulators have been showing their teeth lately, having implemented new standards on IPOs earlier this year. In May JPMorgan became the first global investment bank to be named on a list of sponsors of Hong Kong Stock Exchange deals whose applications were rejected by regulators, a practice HKEx has maintained since 2014 in order to try to make investment banks more accountable for their listings. That deal was a planned spin-off of Shenhua Health Holdings from its listed parent Fufeng Group. 

On October 20, the SFC reprimanded and fined two JPMorgan entities HK$5.6 million for regulatory breaches, one of them for a failure to disclose financial interests in listed issuers covered in its research reports, and the other for offering offshore listed index options without the right registrations.

In September HSBC was fined HK$2.5 million for regulatory breaches around position limits, and in August SFC fined BNP Paribas Wealth Management HK$4 million for overcharging clients.

An outright ban or suspension of licence seems unlikely for an institution of UBS’s scale and reputation; the SFC has done it before, but for much smaller enterprises, such as Mega Capital (Asia), whose licence was revoked in 2012 over its listing application for Hontex in 2009.

UBS continues to be involved in the bigger deals in Hong Kong, and was the sole financial advisor and a joint global coordinator on the Postal Savings Bank US$7.4 billion IPO last month. And fines have tended to be modest in the context of banks’ overall earnings.

But it represents a challenge for the new head of Asia Pacific corporate client solutions, Sam Kendall, who replaced Matthew Hanning following Hanning’s departure in June. Kendall was, after all, head of global equity capital markets at UBS.

That’s not his only problem. The same third quarter results that showed global improvement in profitability showed a decline in operating income from Asia Pacific investment banking, from CHF0.6 billion in the third quarter of 2015 to CHF0.5 billion a year later.

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