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The Bank of England has fined HSBC £57.4mn for failing to protect billions of deposits for hundreds of customers in a “serious” compliance breach that lasted for seven years.
The BoE’s Prudential Regulation Authority said on Tuesday that it had imposed the second-largest penalty in its history after HSBC failed to correctly identify customer deposits eligible for protection under the Financial Services Compensation Scheme between 2015 and 2022.
Under the scheme, banks are required to ensure they have systems and controls in place to help regulators identify those customers who would be eligible for up to £85,000 in protection within seven days of a bank failing.
The regulator said the bank’s mis-steps were “so significant” that it had “materially undermined the firm’s readiness for resolution”. HSBC had also “failed to be duly open and co-operative” with the watchdog in not alerting it for about 15 months about problems it had identified in the incorrect marking of accounts as “eligible” for FSCS protection.
Sam Woods, chief executive of the PRA, said: “The serious failings in this case go to the heart of the PRA’s safety and soundness objective . . . [HSBC’s subsidiary] fell far short of its obligations in this area, and failed to disclose its failings to us in a timely manner.”
The fine is a blow for chief executive Noel Quinn, who has been rebuilding the bank’s reputation and compliance procedures after a series of blows in the years after the financial crisis, in particular when it was fined $1.9bn for helping Mexican drug cartels launder money.
The PRA penalty follows another from the Financial Conduct Authority, which in December 2021 fined HSBC £64mn for “serious weaknesses” in its anti-money laundering controls.
The fine was reduced by 45 per cent because of HSBC’s co-operation in the investigation. It was the PRA’s second-largest penalty after an £87mn fine imposed on Credit Suisse last July for “significant failures in risk management and governance” linked to its exposure to collapsed hedge fund Archegos Capital.
HSBC’s failings trace their origins back to the creation of its UK ringfenced bank to comply with rules requiring the formal separation of consumer and investment banking assets.
The split left too few staff in the non-ringfenced bank with the expertise needed, and no senior manager was given responsibility for the issue.
It resulted in years of rushed and wrong attestations to the regulator that were flagged internally as problematic, the PRA said in its report.
When it could not provide the PRA with the correct information about a particular client in 2019, HSBC launched an internal investigation. By 2021, it realised that it had wrongly classed £4.5bn of deposits for 242 clients as ineligible for FSCS protection and another £2bn of deposits for 120 customers were incorrectly excluded from its regulatory report.
The FSCS report for HSBC’s non-ringfenced bank only included £2mn of deposits for 150 clients, so 99 per cent of eligible deposits and 70 per cent of customers had been wrongly excluded from the scheme. HSBC had also been underpaying its fees to the FSCS.
Among a number of other failings, HSBC also failed to produce finalised versions of annual reports required to be signed by its board of directors that confirmed compliance with the requirements of the deposit scheme and provided an incorrect confirmation to the PRA that its systems met certain requirements of the scheme, the regulator said.
In a statement, HSBC said it was pleased to resolve the matter: “The PRA’s final notice recognises the bank’s co-operation with the investigation, as well as our efforts to fully resolve these issues. We continue to remain focused on serving our customers.”
HSBC declined to comment on whether any employees had been disciplined or removed from their roles as a result.
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