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HSBC has failed in its appeal against a record fine from Hong Kong authorities over a series of failures at its Swiss private bank, including the irresponsible sale of structured products linked to Lehman Brothers in the run-up to the financial crisis.
The bank was fined HK$400m ($51m) after a tribunal upheld an earlier decision by Hong Kong’s Securities and Futures Commission accusing it of “material systemic failings in its marketing and sale of derivative products”.
Nonetheless, the fine was lower than the HK$605m initially demanded by the SFC.
The Securities and Futures Appeals Tribunal (SFAT) said HSBC’s actions put “many clients at unnecessary risk of loss and indeed result[ed] in substantial losses for many”.
HSBC Private Bank (Suisse) will also lose its licence to advise on securities for one year, while its licence to deal in securities will be partially suspended for a year.
HSBC said the suspensions will not affect its current private banking operations in Hong Kong, as it now operates under a different legal entity.
The tribunal said the private bank continued to sell products linked to Lehman Brothers until as late as September 3 2008 – just two weeks before the US investment bank collapsed – even though it was aware of Lehman Brothers’ deteriorating condition. The bank’s head office in Geneva had ordered a review of its own credit exposure to Lehman more than a month earlier, but did not warn its clients about the increasing credit risk of the products.
The regulator also found that HSBC’s internal processes failed to understand clients’ risk profiles and match them with suitable products over a longer period from January 2003 to December 2008.
Although the final penalty was smaller than initially suggested, the SFAT expressed hope that it would be large enough to serve as a warning to other companies that “penalties imposed for convenient avoidance of the requirements of the Code of Conduct will constitute something more severe than the mere ‘cost of doing business’.”
Ashley Alder, SFC chief executive, said:
The message should be clear: our standards are designed to protect all investors including clients of retail or private banks. When breaches of these standards occur, the SFC will take action to enforce them and strive to achieve outcomes that are in the interest of the investing public.
HSBC it “is committed to delivering fair outcomes for our clients and the orderly and transparent operation of financial markets. HSBC Private Banking has stringent processes and controls which are in line with the evolving regulatory landscape, and has enhanced its investment advisory model to further align investments to client needs and to deepen clients’ understanding of the nature and risks of the products.”