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HSBC fined $51mn over Lehman-linked notes

HSBC fined $51mn over Lehman-linked notes

The Hong Kong branch of HSBC’s Swiss private banking business has been fined HKD 400 million ($51.2 million) over the sale of Lehman Brothers-related structured notes, the Securities and Futures Commission (SFC) said in a statement.

This comes after the Hong Kong Securities and Futures Appeal Tribunal (SFAT) upheld the SFC’s disciplinary action against the bank but reduced the initial fine of HKD 605 million ($77.4 million).

Authorities have also suspended HSBC Private Bank (Suisse) from advising on securities for one year and its registration for dealing in securities has been partially suspended for the same period.

It is now only allowed to handle trading in listed securities for clients and provide advice incidental to these securities. Structured products are traded over the counter.

HSBC said the suspension of these licences won’t affect its private banking operations in Hong Kong as it stopped operating under the Swiss entity in 2013.

It now operates under The Hongkong and Shanghai Banking Corporation Limited, the principal operating entity of the HSBC Group in Asia Pacific.

According to the SFC, between January 2003 and December 2008, HSBC failed to identify the true risk profile of clients, ensure product suitability and supervise and monitor the sales process to avoid risk mismatch, consequently falling short of standards set in the SFC Code of Conduct.

‘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,’ said SFC CEO Ashley Alder.

Regulators found that HSBC was aware of the deteriorating financial condition of Lehman Brothers by the summer of 2008 and ‘materially’ reduced exposure to the bank.

It continued to sell Lehman Brothers-related notes, which included daily accrual notes and equity-linked notes, without disclosure of the issuer’s name in some cases, till 3 September 2008.

This was two weeks prior to the landmark collapse of the Lehman Brothers. Between January 2006 and September 2008, the bank distributed the notes in 3,961 transactions, earning a revenue of about HKD 94.6 million ($12.1 million).

SFC also highlighted HSBC’s failure to limit client exposure to forward accumulators, which brought in revenue amounting to HKD 2.19 billion ($280 million) from 55,564 transactions between 2003 and 2008.

Under HSBC’s policy, a client is not to invest more than 10% of the portfolio in a single structured product or more than 5% in the case of a high risk product.

However, investigations concluded that HSBC did not follow the policy for forward accumulators, despite classifying them as high risk. No other suitable policies were put in place to avoid overexposure by clients.

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