The case related to failures in the sale of structured products – namely, Lehman Brothers-related notes (LB-Notes) and Leverage Forward Accumulators (FAs).
Despite the deteriorating financial climate in summer 2008, HSBC Private Bank (Suisse) reduced its own exposure to Lehman Brothers but continued to sell LB-Notes to clients until up to two weeks before the collapse of the US investment house.
HSBC also failed to disclose to clients that the LB-Notes were issued by Lehman Brothers and did not warn them about the increasing credit risk associated with the product during the sales process.
Between January 2006 and September 2008, HSBC Private Bank (Suisse) distributed 480 LB-Notes which involved 3,961 transactions and a total nominal value of HK$12.7bn.
The gross revenue earned by the bank from these transactions was HK$94.6m.
The investigation also found that there was a risk mismatch in over 80% of the outstanding LB-Notes transactions. Clients who were categorised with “low” to “medium” risk tolerance levels were sold LB-Notes that were rated the riskiest by the bank.
SFAT determined that the bank’s culpability was “extensive, putting many clients at unnecessary risk of loss and indeed resulting in substantial losses for many”.
The LB-Notes were sold to customers on a private placement basis, which means that only professional investors could take part.
- trust corporations with assets over HK$40m;
- any individual with an investment portfolio of not less than HK$8m;
- any corporation or partnership with a portfolio of at least HK$8m or total assets of not less than HK$40m; and,
- any corporation whose sole business is to hold investments and is wholly owned by an individual who, either alone or with any of his associates on a joint account, has an investment portfolio of not less than HK$8m.
The tribunal added that a fine of HK$400m is appropriate and recognises that “it is also exemplary in that for the greater protection of the integrity of Hong Kong’s financial markets, it provides a stern warning that principles of professional conduct must be adhered to”.
“Put another way, that – in future – penalties imposed for convenient avoidance of the requirements of the Code of Conduct will constitute something more severe than the mere ‘cost of doing business’,” the SFAT added.
Substantial sanctions required
Ashley Alder, SFC chief executive, said: “HSBC Private Bank (Suisse) SA’s systems and controls for selling structured products fell significantly short of the standards expected of them. 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.”
“The message should be clear: our standards are designed to protect all investors including clients of retail or private banks. When breaches of these standards occur, the SFC will take action to enforce them and strive to achieve outcomes that are in the interest of the investing public,” he added.
In addition to the fine, the bank’s Type 4 regulated activity (advising on securities) has been suspended for one year and Type 1 regulated activity (dealing in securities) has also been partially suspended under the Securities and Futures Ordinance (SFO) for a year