How HSBC became the world’s most accident-prone bank
Continual problems with regulatory due diligence at the global institution are not just down to size, writes Michael Bow
‘They have got fingers in more pies and are exposed to more regulatory risk than anybody else’
‘Regulation is not at the forefront of things senior executives would worry about – like the day-today business of the bank’
HSBC was hit with the second largest fine ever imposed by the financial stability watchdog yesterday after it mistakenly excluded billions of pounds of customer deposits from a key compensation scheme.
The Bank of England’s Prudential Regulation Authority (PRA), which keeps Britain’s finance system on an even keel, fined HSBC £57.4m for failing to flag thousands of customers accounts as being eligible for payouts if the bank collapsed. The penalty is the latest setback for the accidentprone bank, which has been seeking to draw a line under a litany of regulatory run-ins since the financial crisis. Details of its latest failure will also raise questions about internal controls at the £120bn bank, which boasts a sprawling empire stretching from Beijing to London.
In its assessment of HSBC’S oversight, the PRA’S assessment was blunt.
Sam Woods, chief executive of the watchdog, said: “The serious failings in this case go to the heart of the PRA’S safety and soundness objective.
“It is vital that all banks comply fully with our requirements around preparedness for resolution.”
The seriousness of its failure was reflected in the size of the fine, which was dwarfed only by an £87m penalty handed to Credit Suisse by the PRA last year. The regulator found that HSBC had failed to notify authorities about the scale of deposits eligible for compensation, threatening chaos if the bank had collapsed. Under the Financial Services Compensation Scheme (FSCS), customers are compensated for up to £85,000 in their accounts if the bank goes bust.
And they are entitled to their cash within seven days. To ensure the smooth running of the system, the PRA and the FSCS requires up to date information about how many customers might need repaying.
HSBC Bank, which is separate from HSBC UK, was found to have wildly misjudged the amount of customer accounts eligible for the scheme between 2015 and 2021.
An early internal estimate from the bank found it was under-reporting around £112bn worth of deposits, representing nearly six in 10 customers and 99pc of deposits.
If HSBC had gone bust, which the PRA said was never likely, depositors would have struggled to get repaid – raising risks across the financial system. Guy Wilkes, a financial services lawyer at Mishcon de Reya, said: “These are very technical rules and probably misunderstood by senior management.
“It’s something they need to do but this is only something that happens if the bank goes insolvent. It’s not at the forefront of things senior management would worry about like the day-to-day business of the bank.”
The incident is an embarrassing blow to HSBC chief executive Noel Quinn, who has been overseeing a renaissance in the bank’s fortunes over the past 12 months.
He is due to unveil full-year results on Feb 21 and may face questions over the bank’s approach to regulatory control, which has long haunted the lender.
A decade ago, the bank was fined a record $1.9bn (£1.5bn) over money laundering Mexican drug cartel cash and the bank is still trying to rebuild its reputation from the incident.
Further run-ins with authorities in the US and UK have followed and they all appear linked to one factor: the inability of officials to keep a detailed eye on HSBC’S vast empire.
Internal tensions and competing spheres of influences have always been a fixture at HSBC. Even going back to the early days of the Hongkong and Shanghai Banking Corporation when management in Hong Kong would work uncomfortably with branch managers in London.
When HSBC bought the Midland Bank, now known as HSBC UK, in 1992, it added a further layer of complexity.
All of this has posed a challenge to management seeking to impose their style on a bank which has more than 200,000 employees. Gary Greenwood, analyst at Shore Capital, said the modern day HSBC appeared to suffer more than others simply due to its size. “The market takes the view that they are prone to these sorts of errors on an ongoing basis,” he says. “It’s a function of being a very large complex organisation operating in a highly regulated market.
“They have got their fingers in more pies and are exposed to more regulatory risk than anybody else. It’s more likely to have an incident.”
The latest control failure was largely due to the ringfencing of the HSBC UK retail division from the broader bank in 2018, setting apart branch operations from more corporate matters. The PRA found that this decision prompted a shortage of experts in the corporate HSBC Bank division, which was found to have been responsible for 99pc of the failings.
Evidence of issues came to light in October 2018, when HSBC Bank was still trying to file a report on eligible accounts on the day it was submitted. Subsequent filings reports were either missed or entire sections left blank.
In another incident in October 2019, the PRA flagged to HSBC Bank that a customer account may not have been marked as eligible for compensation.
HSBC Bank organised an internal working group of 15 people to get to the bottom of the issue but the committee, which did not keep notes and had no lead chairman responsible for decisions, came to the wrong conclusion that accounts were being marked correctly.
This happened due to “an absence of subject matter experts,” the PRA said.
“Things fell through the cracks and no one intended this to happen,” says Wilkes.
“It looks to have been a cock-up and misunderstanding but it’s so important to get this right that the PRA hit them with a penalty for getting it wrong. Other banks will be double checking this from now on.”
Both HSBC UK and HSBC Bank plc were fined.
However, HSBC secured a 45pc discount on an original fine of £96.5m after admitting the breaches early in the investigation and agreeing to pay a fine.
In total, HSBC broke eight separate codes of the UK rule book around protecting customer deposits.
One of those rule breaches, known as Fundamental Rule 8, is the first time the PRA has fined a bank for failing to be prepared for a run on the bank.
It is one of the most basic rules a bank must follow and the PRA found that HSBC had flouted the rule.
The PRA said HSBC’S breaches were not “deliberate or reckless”.
A HSBC spokesman said: “HSBC is pleased to have resolved this historic matter, which relates to the bank’s compliance with certain parts of the PRA’S Depositor Protection Rules.
“The PRA’S final notice recognises the bank’s cooperation with the investigation, as well as our efforts to fully resolve these issues.
“We continue to remain focused on serving our customers.”