Global law firms have been actively hiring regulatory and investigations lawyers in Hong Kong during the past 12 months, hoping to capture more work in the government enforcement space.

They may be disappointed.

Since the beginning of 2018, at least eight international firms, ranging from Magic Circle firms to the affiliate firm of Big Four's EY, have hired litigation partners who focus on regulatory work related to the Securities and Futures Commission (SFC) – Hong Kong's securities regulator.

But regulatory lawyers in Hong Kong say SFC enforcement work has been in decline for several years, especially since the government agency installed a new enforcement chief in 2016.

“There's been a huge reduction in enforcement work because of a difference in style,” said David Morrison, a senior partner at MinterEllison, who in January led a nine-partner team to MinterEllison from Reed Smith Richards Butler.

In 2016, Thomas Atkinson, the former head of enforcement at Canada's Ontario Securities Commission, became the SFC executive director of enforcement. Atkinson succeeded Mark Steward, who stepped down after nine years.

Steward, who went on to become director of enforcement and market oversight at the U.K.'s Financial Conduct Authority, helped expand the SFC's enforcement efforts. The number of investigations started each year more than doubled to 553 in 2014-15 from 205 in 2007-08. And his tenure in Hong Kong gave rise to high demand for regulatory lawyers.

“The market has acclimatised to Mark Steward's approach, which was more comprehensive and much more dynamic,” said Morrison.

Atkinson has taken a different approach – in a 2016 speech, he said he wanted to “focus on quality over quantity”. After taking office, Atkinson conducted “strategic reviews” to identify key risk areas to prioritise enforcement actions. As a result, the number of new investigations started to drop in 2016, and in 2017-18 it fell to 280 – the fewest number since 2011.

A Hong Kong litigation partner at a U.S. firm, who did not wish to be identified, said Atkinson tends to be more strategic with investigations and settles routine cases more quickly. This has led to a shrinkage of SFC-related work, the partner said.

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Bigger, high-profile cases 

To be sure, lawyers are finding silver linings in the overall reduction of case volume. There is still demand in large, high-profile cases and compliance work, they said.

Wynne Mok, a litigation partner at Slaughter and May's Hong Kong office, said the SFC's focus on more serious and high-priority cases can lead to even higher demand for legal advice. “Should a company or person be under investigation, they will need to treat the matter more seriously and should therefore seek proper advice from a regulatory expert,” she said.

Before joining the Magic Circle firm in September, Mok was a director of enforcement with the SFC.

Aggregate fines imposed by the SFC have increased in the past five years, according to a February report by Freshfields Bruckhaus Deringer. In 2018, almost $25 million of fines were imposed, rising from about $8 million in 2014, the report said.

In 2017, the regulator imposed a record $63.7 million in fines, according to a 2017 Freshfields report. That record sum was due mostly to a $51 million fine against HSBC Private Bank (Suisse) SA, the Hong Kong branch of Switzerland-based private banking business of HSBC Group, for selling highly risky derivative products before the 2008 financial crisis.

MinterEllison's Morrison, who specialises in high-stakes corporate, regulatory and securities litigation, also sees demand for his team's skills when these more serious cases arise.

“When the stakes go up, the demand for what I do goes up,” he said, pointing to a combined record $100 million fine imposed on several big global banks in Hong Kong last month.

On March 14, the SFC fined UBS $48 million and banned the Swiss bank from sponsoring initial public offerings in Hong Kong for 12 months – the first such ban for a major global bank – for failing to conduct proper due diligence on several IPOs it sponsored. The financial regulator also fined Morgan Stanley $29 million, Merrill Lynch $16 million and Standard Chartered almost $8 million for similar due diligence failures.

“That's what Atkinson meant as 'strategic',” Morrison said. “Doing the big cases.”

Mok added that her former employer adopted a new “front-loaded” approach – which SFC chief executive officer Ashley Alder described in 2017 as placing more emphasis on earlier intervention and on the biggest threats. So regulatory lawyers may be brought in earlier than they were before, she said.

“Nowadays, our regulatory lawyers are asked to advise during the due diligence process and to conduct internal audits to ensure compliance with the standards expected by the SFC,” Mok said, explaining that before, regulatory lawyers would help when allegations of fraud might have emerged post-IPO.

More work ahead?

An increase in preventative regulatory work, such as compliance, resulted from the flood of companies that listed in Hong Kong during the past decade. There are currently more than 2,300 companies listed in Hong Kong, including on the Hong Kong stock exchange's small-cap Growth Enterprise Market. This is almost double the 1,266 Hong Kong-listed companies in April 2009.

“Hong Kong has listed a large number of companies in the past decade, and from time to time the issuers can get into trouble,” said Mark Lin, a litigation partner with Hogan Lovells in Hong Kong, who focuses on the financial services sector.

Last year, the Hong Kong Stock Exchange saw 218 new companies listed, up nearly 30 percent from the previous year. The exchange also made changes to its listing rules – allowing dual-class share structures as well as biotech companies with no revenue to list.

Lin said the new listing rules could also bring work from issuers whose management is still learning to comply with the Hong Kong listing rules and the Securities and Futures Ordinance, although the work may come a few years down the line because there is sometimes a time lag between breaches by new entrants and enforcement.

Issues related to listed companies are also a top priority for the SFC's enforcement team, according to Atkinson – particularly risks posed by corporate fraud and malfeasance.

Firms also made relevant hires to recover from previous relocations or losses. Linklaters, for example, hired former Goldman Sachs managing director Andrew Chung as a litigation partner in Hong Kong last year after two senior regulatory investigations specialists, Marc Harvey and Gavin Lewis, relocated to London. The firm also promoted to partner Sumit Indwar and Denise Fung, in 2017 and 2018, respectively. Clifford Chance's hire of former SFC enforcement lawyer Jimmy Chan last year also followed litigation partner Matthew Newick's moving back to London in 2017.

Reed Smith has started to rebuild its Hong Kong regulatory team by hiring Kennedys' Hong Kong regulatory co-head Mark West after it lost about 25 lawyers, including nine partners, led by Morrison, to MinterEllison. And while Eversheds did hire former SFC counsel John Siu in September, it lost former Asia head of financial services disputes and investigations Veronique Marquis in February.

“Generally, there has been a trimming down of SFC work and firms are having to work hard to maintain the scale of the practises,” the U.S. firm litigation partner said. ”We're not expecting it to grow beyond current levels. It will depend on random events – like a corporate scandal.”

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