Scandal sweeps back through Standard

STANDARD CHARTERED has not lost its touch. After two years of spectacular share growth and of steadily increasing confidence that it had left its accident-prone past behind it, the bank has bowled another googly to its long-suffering investors.

The announcement last Tuesday by the Securities and Futures Commission, Hong Kong's stock market regulator, that Standard had abused securities regulations sent shockwaves through the banking community in the Crown colony. Standard was found by the SFC to have broken the rules on initial public offerings (IPOs).

Some 20 senior bankers and dealers from Standard Chartered Securities and Standard Chartered Asia, the broking and merchant banking subsidiaries, have been sacked and the bank has been banned from the IPO market until next April.

Other banks are still under investigation by the SFC, and the assumption on the island is that the finger of guilt will be pointed at more institutions in due course.

In explaining its Hong Kong transgressions, Standard has been using the 'Guinness defence': everyone was doing it, so it didn't seem wrong. Then the authorities unexpectedly tightened up the rules and caught everyone out. To those familiar with Hong Kong, the claim that many other banks were up to the same tricks as Standard rings true.

Cleaning up stock market practices on the island is likely to prove a regulator's nightmare. The can of worms opened by the SFC's investigations almost certainly means an end to any thoughts of self-regulation in the Hong Kong market, which now looks set to become one of the most tightly regulated of the world's major stock markets.

Standard's transgressions included supporting clients' share prices after flotation and allowing employees to benefit from customer share dealing - a practice known as 'rat trading'. Despite the bank's insistence that these activities were widespread in Hong Kong, the debacle has again raised the question of whether Standard's internal controls are adequate.

'They should have been trying to establish a reputation for excellence,' said Christopher Ellerton, banking analyst at SG Warburg. Although Standard is unlikely to suffer much direct financial loss - which is why its share price hardly moved on the news, the blow to its reputation in the Asia-Pacific region could be significant. 'In merchant banking, reputation is crucial,' Mr Ellerton pointed out.

There was, moreover, a depressing inevitability to the banning. It is only the latest in a series of accidents, dating back more than 10 years, that have befallen the bank every 18 months or so. The last one came in 1992 when Standard was accused by the Indian authorities of participating in a massive securities fraud in Bombay. Despite protesting its innocence, the bank lost pounds 300m and is still waiting to be fined.

The scandal raised serious doubts over Standard's internal controls, particularly when the chief executive, Malcolm Williamson, admitted he had received no early warning of the problem. Subsequently, Standard claimed it had tightened up its controls, but the events in Hong Kong must throw that into question.

A long trail of banana skins

1986: Tan Sri Khoo Teck Puat, a Malaysian businessman, resigns as director because of his involvement in the collapse of the National Bank of Brunei. Bank of England assures Brunei that Standard will honour the commitments of its branch there.

1987: Bank of England investigates whether 'inducements' were offered to three 'white squires' during the Lloyds bid.

1988: Standard sells United Bank of Arizona for dollars 100m loss. Exonerated in white squires investigation.

1989: Profit warning over losses on loans to Miniscribe because of fraud. Forced to pay pounds 2.3m in extra taxes for failing to disclose land sale profits in Tokyo.

1991: Standard leads bank creditors in Brent Walker collapse with pounds 30m exposure. Run on Hong Kong branches after BCCI collapses.

1992: Bombay scandal breaks.

1993: Losses from Bombay scandal reach pounds 300m.

1994: Punished by SFC for securities irregularities.