Broadly speaking, the economies of Asia comprise the largest financial and population bloc in the world. Throughout the Global Financial Crisis, many of Asia’s strongest economies remained surprisingly resilient, thanks in no small part to the staggering growth rates China sustained throughout the period.
But times are a-changin’. As the boom in China retracts to more sustainable levels of growth, it brings with it increasingly dim prospects for the region as a whole – as flat external demand, weak global growth, and a complete bottoming out of international commodity prices is having a marked impact on the bottom line. So companies are often having to do more with less, which is having a run on to the legal department – who are still expected to keep abreast of quickly developing and increasingly stringent regulatory regimes, which are fast becoming a calling card of the Asian economies.
Trouble ahead?
For Torbjorn Hallberg, vice president and general counsel for emerging markets at Takeda Pharmaceuticals, fiscal pressures are presenting a host of new challenges for legal to grapple with – usually the last part of the business to feel the burden of cost control.
‘There is a sense that there is a continued need to contain costs for legal departments (do more with less) and in-house counsels are increasingly overseeing the management of risks and costs,’ he said, explaining that this had an impact not only on how departments were run internally, but also how external services were procured.
‘Legal departments are therefore as one measure increasingly looking towards external counsel to provide not only excellent legal advice, but a focus on increasing their value proposition. External firms with this approach will continue to stand out.’
Interestingly, while the slowdown of the economy as a whole was having an impact upon the legal functions of companies somewhat indiscriminately, the unique ways in which these situations manifest across different sectors is creating individual challenges for in-house lawyers to deal with.
Leslie Zhang, director of the project management division and legal department at China National Offshore Oil Corporation (CNOOC) explained that falling commodity prices in particular were having a direct impact on his work due to the changing behavior of companies with regards to how they dealt with a slump, saying: ‘Because of commodity prices being so low, within our industry we have to deal with different challenges than we usually might. For example, we’ve had more potential disputes with partners than we generally would. The changing commodity prices changes the environment we operate in and that presents new challenges for the legal department.’
Regulatory reform
In the wake of the global financial crisis, regulatory reform was top of the agenda not just for countries which had felt the destructive impact on their economies, but also those looking to insulate themselves and ensure that their own financial markets wouldn’t succumb to the same pitfalls. For those operating within Asia, that’s meant not only a raft of new regulatory requirements to comply with and major changes on the horizon – with the likes of the Basel III reform requirements for banks around the corner, but also a changing regime at the helm altering the soft-side of regulation.
‘Certainly, with introducing new regulations, you’re probably going to see a bit more homogenised practices with nuances per jurisdiction,’ says Bobby Ladwa, director of banking legal at Barclays, adding that the differences in the contemporary environment ‘aren’t as stark as they were 10-15 years ago as we saw in certain jurisdictions.’
‘A good example of that was the sponsor regime in Hong Kong,’ he adds. ‘When they were looking at that, the Hong Kong industry and regulators basically did jurisdictional analysis with equivalent regimes such as the US, UK, and Singapore and had a look at what they were doing there when they were rolling that out. The regulators are definitely speaking to each other a lot more.’
In response to a heightened requirement for more stringent regulation and a desire to better align policy both with those who utilise it in practice and with international regulatory frameworks, an influx of new talent has been brought on-board by regulators themselves to help navigate an inherently more complex environment.
‘The regulators have been beefing up their teams and getting people in who are from private practice, who have very good experience with doing international deals and dealing with regulators, companies and investors. They’ve got people there who have experience working in other jurisdictions with advanced regulatory regimes, so I think that has a real knock on effect in the terms of the policies and regulatory approach,’ says Ladwa.
But beyond the more standardised global frameworks continually being implemented, the regulatory reaction within individual markets in response to contemporary domestic climates has also been telling; in many respects becoming more relaxed in order to stimulate investment.
‘Regulators are generally fairly swift and quite agile about responding to the markets. Certainly much more so than before – they wouldn’t be regularly issuing updated rules and guidelines on issues like opening up their economy,’ explains Ladwa.
Ladwa says that this is especially evident with China and India, who generally tend to be far more reserved with how they open aspects of their economy to external investors.
‘China and India have been pretty good about opening up their market a little bit. I think that’s in response to their domestic markets slowing down and they are having to be a bit more receptive to foreign investment and foreign lenders. They’re still quite cautious, but much more receptive than previously,’ he told us.
But Zhang says it’s not just about attracting capital – Chinese businesses going out are having an increasingly easier and more streamlined time. After a slew of overseas investment during the peak of the global financial crisis, a downturn in outwards-facing investment has seen the government keen to stimulate capital flows in both directions.
‘Typically, the government’s perspective has been to encourage a company to invest more overseas. It’s a policy that in the past had a lot of regulation to control overseas investment. But after several years and lessons learned, there is no longer a need to have as many government approvals as there was before,’ says Zhang.
Navigating a tough environment
Despite the implementation of new regulations (in theory) opening new opportunities for business, while helping to create a fair and sufficiently supervised market to operate in, the upshot for in-house counsel is a raft of new reforms to come to terms with.
‘Companies will have to manage the increasing complexity of new laws and regulations. Heavy reliance by companies on their in-house counsels in Asia is not only prudent but essential in managing a significant business risk,’ explains Hallberg.
That becomes an increasingly difficult prospect with a lowered resource base to operate with at present because of the financial dip. Hallberg says that puts the onus back on the in-house team to remain focused on the new requirements, but not lose sight of how that fits into the big picture.
‘It will continue to be important for a legal department to have the overall global insight, but also depth of local knowledge in order to serve the needs of local businesses, as these are run and managed locally. Being close to the business will continue to be key for in-house departments,’ adds Hallberg.
Zhang says that in an effort to stay ahead, his team is investing heavily in pre-emptive measures – spending both fiscal and human capital to keep up with the changing regulatory platform – a measure he considers of primary importance for a company which is reliant on its international clients and partners.
‘We are placing increased emphasis on watching the development of new legislation and regulatory policies, to make sure we can ensure the company is well prepared for the effects of any changing legislation and our legal team is prepared for the changes well ahead of time,’ he explains.
Zhang explains that at CNOOC, they have established an internal ‘think tank’ to propagate legal and regulatory information amongst their teams – both from an industry and business perspective.
‘We’ve put much more of a focus on knowledge management, which basically means that we keep the assurance that our legal staff has our internal and external knowledge. It’s about making sure that those lessons and experiences can be inherited and developed and we don’t lose those crucial learnings,’ he told us.
But, adds Ladwa, there is more to remaining compliant than just understanding the hard-and-fast rules of the regulatory regime. Rather, a consideration of the soft-side of rules – what the regulators are looking for and how they would go about enforcement in differing jurisdictions is equally imperative.
‘You need to know not just the regulatory landscape, but also have a practical understanding of the types of market participants involved and the way in which they work. It’s about having a hard understanding of the rules and the specific regulations, but a soft understanding of how they operate in practice,’ says Ladwa, adding:
‘In terms of enforcement, that will probably still vary a bit. It may not be as consistent in some markets and some jurisdictions may be quite open about making an example by enforcing. But other jurisdictions are not so much, so that aspect could be more locally driven.’
Finding future success
With managing the soft-side of regulation seen as a key factor in achieving success within the region, for Ladwa the focus goes back on human capital – having the right people in the right places, with the right information at their disposal. This judicious use of talent is becoming even more pressing with the crunch on resources from the slowdown.
‘You basically need to have people on the ground or very clued up and in tune with what the regulatory landscape is, its impact on the business, and what sort of things could change. That also means you need people who are either locally qualified or have a very good understanding of that landscape and how it works,’ said Ladwa.
That’s a sentiment that Hallberg agrees with, offering the view from a European-domiciled lawyer with a major focus on Asia, adding: ‘Developing as well as attracting the right talent is key for legal departments to react nimbly to changes in the business environment, including regulatory changes. A legal organisation that can handle cultural differences, geographic distances and lead the team as one and cause it to perform as one team will have a substantial advantage.’
But both agree that investing in human capital on the regulatory front goes beyond legal, instead making sure that the business as a whole reflected the ethos that regulators were looking to instil, ensuring that workers across the business were clued up on what was required of them to comply.
‘I think regulators are focused on things like conduct and culture as well, so there may be rules that determine what you can and can’t do, but also the way in which you’re doing business as well is important,’ says Ladwa.
Added Hallberg: ‘Regulatory reforms have for sure created more complexity and therefore more work for the in-house legal functions. The need to educate and train internal stakeholders as well as to play an integral part in the key decision planning and evaluation process and businesses is more important than ever.
Ladwa explains that at Barclay’s, the in-house legal function worked with the regulatory team and the wider business to conduct training sessions which were focused, pragmatic and meaningful to the departments being instructed – cutting through what was irrelevant and outlining practical steps towards compliance.
‘It’s obviously all well and good that we as lawyers in the bank know the rules and regulations and how it’s all applied, but then how you disseminate that information in a meaningful way is really critical. Giving practical advice on how certain things can be done, so that we’re compliant with not just the letter of the regulators, but the spirit of it as well,’ says Ladwa.
‘We have training. That has a focus on practicality. Obviously it will drive our policies and procedures and the way in which we craft that, but usually it won’t just be a lot of text, instead based on the business and the type of business you’re doing, specific, practical advice on how you would go about doing what we’d like to be doing if it’s possible.’