The UK Financial Services Authority has handed down its largest ever retail fine of £10.5 million ($16.64 milllion) to global bank HSBC because of inappropriate investment advice provided to seniors.
The FSA says that, between 2005 and 2010, one of HSBC’s subsidiaries, NHFA Limited advised 2,485 customers to invest in asset-backed investment products to fund long-term care costs. The products were sold to individuals entering, or already in, long-term care and in many cases these elderly customers were reliant on the investments to pay for their care.
Typically these investments are recommended for a minimum period of five years, but the regulator found that the advice and sales were unsuitable because in a number of cases the individual’s life expectancy was below the recommended five-year investment period. As a result, customers with shorter life expectancies had to make withdrawals from these investments sooner than is recommended.
The FSA says that the combination of withdrawals and product charges led to faster reduction of capital than should have been the case if customers had received the right advice. And it reports that a review by a third party of a sample of customer files found unsuitable sales had been made to 87% of customers involving these types of investments.
“It was clear that HSBC’s subsidiary, NHFA, had not considered the individual needs of its elderly customers and failed in many cases to recommend suitable products for their circumstances,” the FSA says, adding that it views the firm’s failings as particularly significant because: its customer base was particularly vulnerable; the firm was the leading supplier in the UK of independent financial advice on long-term care products; the misconduct occurred over a period of approximately five years; and, a significant number of customers may have suffered financial detriment.
In addition to the regulatory fine, HSBC estimates that the amount of compensation to be paid to NHFA customers will be approximately £29.3 million. It is undertaking a past business review to determine if customers of NHFA or their families are entitled to redress and will contact customers directly.
The FSA notes that HSBC agreed to settle at an early stage entitling it to a 30% discount on its fine. It also demonstrated its commitment to making changes to its operations. HSBC closed NHFA to new business in July.
“NHFA was trusted by its vulnerable and elderly customers. It breached that trust to sell them unsuitable products. This type of behaviour undermines confidence in the financial services sector. HSBC, who owned NHFA, has now recognised the issues and taken steps to do the right thing. They have been given credit for that – but for some customers it will be too late,” says Tracey McDermott, acting director of enforcement and financial crime. “This penalty should serve as a warning to firms that they must have the right systems and controls in place to manage and identify risks when they acquire new businesses. A failure to do so can lead not only to detriment to their customers but to significant reputational and regulatory cost.”