Recent revelations of possible tax evasion by clients of HSBC highlights industry-wide compliance risks for global banks, says Fitch Ratings.
In a new report, the rating agency says that the recent publication of historical details on client transactions at HSBC’s Swiss private banking subsidiary, and the allegations that the bank helped clients evade tax, illustrates the risks that banks face for compliance and conduct breaches.
This increase in conduct, legal and regulatory risks is industry-wide, Fitch also says. “Wealth management in general gives rise to material reputation and operation risks,” it says.
In HSBC’s case, Fitch suggests that organizational complexity and a lack of management oversight may have also played a role in its conduct failings. “We believe the control environment in HSBC’s wealth management has been strengthened considerably since the period of alleged wrongdoing. But renewed scrutiny of practices at the private banking subsidiary and possible investigations could result in new fines or other legal action,” Fitch says. It also warns that the bank remains exposed to additional legal issues, such as investigations into interest-rate setting.
Notwithstanding the improvements at HSBC, which should help compliance and protect its reputation, Fitch says that “conduct risks cannot be fully averted for such a large and diversified group.”
Still, Fitch says that HSBC’s financial results are expected to remain solid. “Reliable income from global customer relationships and tight cost control should help offset sustained litigation and regulatory risks,” it says. “We believe conduct charges, both direct and from reputational damage to the franchise, should remain manageable for HSBC’s capitalization and profitability at its current rating.”