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Hong Kong Fines HSBC Record HK$400 Million Over Lehman-Linked Failings

Tom Burroughes

22 November 2017

A Hong Kong branch of HSBC’s Switzerland-based private banking group, has been fined a record HK$400 million ($51.2 million) after a tribunal in the Asian jurisdiction upheld a regulator’s disciplinary action against the bank for failings around sales of derivative products. 

HSBC Private Bank (Suisse) SA was fined the upheld the SFC’s disciplinary action. The “material systemic failures” related to sales of Lehman Brothers-related Notes (LB-Notes) and Leveraged Forward Accumulators (FAs) – in the run-up to the global financial crisis in 2008.

In addition, the SFC said the private bank’s registration for Type 4 regulated activity (advising on securities) has been suspended for a period of one year and its registration for Type 1 regulated activity (dealing in securities) has also been partially suspended under the Securities and Futures Ordinance for a period of one year.

The tribunal said the SFC was correct in its findings and concluded that the bank was “culpable of material systemic failings in its marketing and sale of derivative products by falling short of the standards set out in the SFC Code of Conduct and ancillary guidelines”, according to a statement on the SFC’s website yesterday.

The bank’s culpability was “extensive, putting many clients at unnecessary risk of loss and indeed resulting in substantial losses for many,” it added.

said that the suspension of PBRS licences “will not affect HSBC Private Banking’s current operations in Hong Kong”.

“PBRS is the legal entity which had engaged in the relevant regulated activity in the period between 2003 and 2008. HSBC’s Private Banking business in Hong Kong no longer operates under this legal entity, and currently operates under The Hong Kong and Shanghai Banking Corporation Limited, the principal operating entity of the HSBC Group in Asia Pacific. This legal transfer was completed in 2013 to simplify governance requirements and administrative processes, and to join the same legal entity that houses the other three HSBC global businesses in Asia-Pacific,” HSBC said. 

In its statement, SFC said: “Between January 2003 and December 2008, HSBC Private Bank (Suisse) SA’s internal processes were found to be materially flawed in: understanding each client’s true risk profile; ensuring the suitability of products for each client; and supervising and monitoring sales processes in order to detect and avoid risk mismatch.”

The SFAT said the HK$400 million fine is appropriate and recognises that “it is also exemplary in that for the greater protection of the integrity of Hong Kong’s financial markets, it provides a stern warning that principles of professional conduct must be adhered to”.

“HSBC Private Bank (Suisse) SA’s systems and controls for selling structured products fell 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. Accordingly, we have decided very substantial sanctions are required,” Ashley Alder, the SFC’s chief executive. 

"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,” he added.

Among other details on the SFC website, it said that in 2008: “HSBC Private Bank (Suisse) SA was aware of the deteriorating financial condition and credit quality of Lehman Brothers and had itself materially reduced its exposure to Lehman Brothers. Nevertheless, HSBC Private Bank (Suisse) SA continued to sell the LB-Notes to its clients until 3 September 2008, i.e. two weeks before the collapse of Lehman Brothers, and did not disclose to its clients that the LB-Notes were issued by Lehman Brothers nor warned its clients about the increasing credit risk of the LB-Notes during the sales process.”