Record HSBC fine shows FSA getting tough on retail conduct

The £10.5 million fine imposed on HSBC by the UK Financial Services Authority (FSA) on December 5 is indicative of the regulator's increased focus on enforcement regarding retail products, experts say.

The fine was the largest ever issued by the FSA for retail failings. NHFA, a subsidiary of HSBC, was ruled to have provided "inappropriate" investment advice to elderly customers.

Between 2005 and 2010, NHFA advised 2,485 customers to invest in asset-backed investment products to fund long-term care costs for elderly customers. These investments are usually recommended for a minimum period of five years, but in many cases this exceeded the individual's life expectancy. It became necessary for customers to withdraw funds early, leading to a rapid decrease in capital that would not have occurred had they been given the correct advice, the FSA said.

In addition to the £10.5 million fine, HSBC expects to pay approximately £29.3 million in compensation to customers.

Mary Stevens, manager of regulatory content at global information services firm Wolters Kluwer, believes the latest enforcement action against HSBC shows the FSA is toughening up on the sale of retail products. Previously, punishing market misconduct seemed to be a priority.

"Although the banking sector is obviously made up of retail and wholesale divisions, the vast majority of fines during 2009 and into 2010 were against the wholesale divisions for failures in areas such as senior management systems and controls, transaction reporting and providing information to the regulator," Stevens explains. "While the regulator is still hacking away at the banking sector it is clear it is the retail arm that is now being clobbered for such failures."

"It could be argued the trend began more than a year ago with the fine of £700,000 issued against RSM Tenon for giving unsuitable advice to investors," says Samantha Moore, a partner at London law firm Burton Copeland specialising in regulation.

In February, Barclays Bank was fined £7 million for mis-selling two funds to investors, many of whom were retired or nearing retirement age. At the time this was the highest fine ever issued by the FSA for retail failings, a record that HSBC now holds.

"In the current economic climate where banks, funded by the taxpayer, are coming under ever-increasing scrutiny, it is almost inevitable that the FSA, criticised for its failure to adequately monitor Northern Rock, will want to focus on retail conduct, particularly where vulnerable investors have lost significant savings," Moore says.

At a speech to the British Bankers' Association in March, the FSA's chief executive Hector Sants dismissed fears the agency's successor, the Financial Conduct Authority (FCA), would become a 'product regulator', although regulation of product conduct would be within its remit. "The FCA will [not] be seeking to eliminate all risks nor will it seek to absolve consumers of responsibility for their own decisions," he told the BBA.

However, he conceded that "historically, both the FSA's approach and its powers have proved inadequate to meet the expectations of society with regard to protecting consumers in financial matters", and that its approach to conduct issues had been "essentially passive and reactive". He predicted this would change under the FCA.

Despite this promised change, Moore believes the pressure on the FSA to prosecute firms who mislead customers will continue, and possibly intensify.

"The FSA will be under increasing pressure to ensure any advice firms give to their customers is suitable," Moore says.