HSBC HK hit with ‘record’ HK$400m fine over Lehman notes
The long-running saga of Lehman Brothers-based structured products that were widely sold to retail investors in Hong Kong in the lead-up to the global financial crisis claimed another – and its largest – corporate victim today, in the form of the private banking unit of HSBC.
The bank was hit with what the Hong Kong Securities & Futures Commission said was a “record” fine of HK$400m (US$52m, £38.7m), after an SFC Appeals Tribunal upheld an earlier disciplinary action against it for “material systemic failures in relation to the sale of derivative products – namely, Lehman Brothers-related notes and leveraged forward accumulators” – before Lehman famously filed for bankruptcy protection on 16 September, 2008 in New York.
The products, often referred to in the Hong Kong press as Lehman Brothers’ mini-bonds, had been sold between 2003 and 2008.
In addition, the HSBC banking unit has also been told that its ability to carry out “Type 4 regulated activity”, which involves advising on securities, has been suspended for one year, as of today, and that its registration for Type 1 regulated activity, involving the dealing in securities, has also been partially suspended, also for a year, according to an announcement of the decision posted on the SFC’s website.
The SFC had originally imposed a penalty of HK$605m on the bank, in 2015, for its failure to meet “principles-based regulatory standards” at that time, which was later appealed by HSBC.
This was reduced by HK$205m because it was decided to take into account “among other things that HSBC Private Bank (Suisse) SA’s failings were not not shown to be dishonest, intentional or reckless, and that steps were taken by HSBC Private Bank (Suisse) SA from time to time to improve its systems”, the SFC announcement said.
The SFC said the HK$400m fine was the largest ever imposed on a financial institution in Hong Kong.
HSBC: ‘enhanced advisory model’
In a statement, HSBC today said it noted the appeals tribunal’s conclusion of its review of the SFC’s “investigations into legacy issues concerning the distribution of Lehman Brothers-issued structured notes” and forward accumulators, and that it 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”.
“We remain focused on serving our clients’ needs,” it added.
HSBC said the suspension of the two types of licences would not affect its current private banking operations in Hong Kong, as the specific banking entity involved in the matter is no longer operational, following a “legal transfer” to the existing division in 2013.
With respect to the financial penalty, HSBC said the tribunal would hear submissions from the Hong Kong securities regulator and HSBC.
In a statement, the SFC’s chief executive, Ashley Alder, said the systems and controls used by the HSBC private banking unit in question to sell structured products during the period in question had fallen “significantly short of the standards expected of them”.
“In combination with flawed practices and intrinsically high risk products, the bank’s failures magnified the risk and occurrence of significant losses for customers,” he added.
“Accordingly, we have decided very substantial sanctions are required.
“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.”
Although HSBC today is headquartered in London, its origins lie in Hong Kong and Shanghai. The Hongkong and Shanghai Banking Corporation was founded by a Scotsman named Sir Thomas Sutherland in Hong Kong in 1865, with an outpost opened in Shanghai a month later. HSBC Holdings was established in the UK in 1991, as the parent company to the Hongkong and Shanghai Banking Corporation in preparation for its purchase o the UK-based Midland Bank, and the scheduled “handover” of sovereignty of Hong Kong to China, in 1997.