Bryane Michael, Senior Fellow, Asian Institute for International Financial Law (AIIFL), Faculty of Law, The University of Hong Kong, looks at the implications for corporate service providers (CSPs) of the tougher regulatory requirements imposed on CSPs in the post Panama Papers environment.

A raft of new laws promises to change the way that company secretarial firms attract clients and do business. This article provides an except from a larger report – The Role of Hong Kong’s Financial Regulations in Improving Corporate Governance Standards in China: Lessons from the Panama Papers for Hong Kong – looking at the way the Panama Papers will change corporate governance practices in Hong Kong and the Mainland. The report, authored by myself and Say Goo, Professor and Director of AIIFL, describes how The Hong Kong Institute of Chartered Secretaries (the Institute) can help small incorporation agents and intermediaries to move up the value chain or exit the market. The evidence suggests that tightening incorporation rules and strengthening corporate governance would not radically affect the number of company registrations in Hong Kong. Excluding outliers (the jumbo-sized global incorporation firms), most of the 1,100 incorporation, secretarial and corporate services firms registered by the Hong Kong Trade Development Council (HKTDC) employ on average 10 people. Moreover, we should bear in mind that a very few of Hong Kong’s incorporation agents’ newly incorporated creations stand the test of time. Incorporation agents in Hong Kong thus seem ripe for industry consolidation as more regulatory requirements force these firms to offer extra advisory services in the areas of compliance, corporate governance. The simple half-day one stop-shop incorporation will probably disappear. A cursory look at the data suggests that our proposals (see ‘Our proposals’ box text) would cost Hong Kong’s incorporation industry relatively little. Across the sector, these firms employ close to 10,000 people – a number which the HKTDC data roughly confirm. If only 1% of incorporations deal with non-Hong Kong companies (that is offshore), we can assume that new regulations would impact the ‘expected value’ of only two firms and US$10 million in revenues. If these new regulations choke off even 20% of this business, Hong Kong still only loses about $2 million – hardly a huge dent in an industry worth over US$1 billion. Yet, the undeniable conclusion remains. As roughly 35% of all newly incorporated businesses drop out after some time, one must question the long-term effectiveness of these incorporation agents. What would the remaining incorporation agents morph into? Large international companies handling incorporations in Hong Kong tend to provide a range of services – from advising on incorporation to complex corporate matters like accounting, restructuring, and compliance across borders. Simply complying with the Institute’s AML/CFT Charter will push equilibrium employment and compliance expenses in these companies higher – pushing out the smaller and less competitive firms. Even paying for Thomson Reuters’ World-Check (to check individuals’ background information) will pose a problem for the smaller firms in the incorporation market. A professional body like the Institute could help inform incorporation agents of all sizes about the factors shaping their market – and provide advice to those having to change their service offerings or exit the market. As such our 31st recommendation encourages the Institute to offer workshops explaining how the changes to Hong Kong’s corporate governance rules will change the nature of competition in Hong Kong’s corporate secretarial services sub-sector. Firms that offer a fuller range of services – like helping Mainland and other companies adopt corporate governance reforms – will remain more competitive than the simple incorporation service providers. The post-reform era represents a potential boon for company secretarial firms left standing. They would be offering a greater range of value-added services – and thus earn higher profit margins. They would also attract less ire, ire which ultimately encouraged hackers to attack Mossack Fonseca in the first place. Even if the Institute does not agree with this analysis or the recommendations within, the Institute will have an important role to play in preparing the industry for the post-Panama transition. Bryane Michael, Senior Fellow Asian Institute for International Financial Law Faculty of Law, The University of Hong Kong This article reflects the views of the author only. The full report – ‘The Role of Hong Kong’s Financial Regulations in Improving Corporate Governance Standards in China: Lessons from the Panama Papers for Hong Kong’ – is available online at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2914865.

SIDEBAR: Our proposals

• The Hong Kong Institute of Chartered Secretaries, along with The Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants, should adopt professional rules to include a ‘presumption of transparency’ rather than the current ‘presumption of confidentiality’ to discourage the supply and demand for legal/regulatory avoidance.
• The Hong Kong Institute of Chartered Secretaries should conduct workshops preparing small incorporation agents and intermediaries to move up the value chain or exit the market. Put a beta version of beneficial ownership registers online which company secretarial advisory and management firms could assist clients with.
• Company secretarial and other advisers giving advice on key corporate governance documents should endorse the right to information as a core value in companies’ mission statements.
• For the other 27 recommendations, see the full study (URL provided in the end note).