The Financial Services Authority has issued its largest ever retail fine of £10.5 million to HSBC because of inappropriate investment advice provided by one of its subsidiaries, NHFA Limited to elderly customers.
HSBC estimates that the amount of compensation to be paid to NHFA customers will be approximately £29.3 million in addition to the fine.
Between 2005 and 2010 NHFA advised 2,485 customers to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs for elderly customers.
The products were sold to individuals entering, or already in, long-term care and in many cases these elderly customers were reliant on the investments to pay for their care.
Typically these investments are recommended for a minimum period of five years.
The advice and sales were unsuitable because in a number of cases the individual’s life expectancy was below the recommended five-year investment period.
As a result customers with shorter life expectancies had to make withdrawals from these investments sooner than is recommended.
The combination of withdrawals and product charges led to faster reduction of capital than should have been the case if customers had received the right advice.
A review by a third party of a sample of customer files found unsuitable sales had been made to 87% of customers involving these types of investments.
It was clear that HSBC’s subsidiary, NHFA, had not considered the individual needs of its elderly customers and failed in many cases to recommend suitable products for their circumstances, for example higher fixed interest rate savings accounts and ISAs.
It was also apparent that NHFA’s advisers failed to consider the tax status of customers before making a recommendation.
The FSA views the failings as particularly significant because:
- NHFA’s customer base was particularly vulnerable. The average customer age was almost 83 and they therefore had limited means or opportunity to make up any financial loss resulting from an unsuitable sale;
- NHFA was the leading supplier in the UK of independent financial advice on long-term care products to help pay for care costs, with a market share in recent years approaching 60%;
- the mis-conduct occurred over a period of approximately five years; and
- a significant number of customers may have suffered financial detriment. During the Relevant Period 2,485 customers invested in asset-backed products. The total amount invested was close to £285 million, meaning the average amount invested per customer was approximately £115,000.
The failings breached Principle 9 which states that a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
HSBC is undertaking a past business review to determine if customers of NHFA or their families are entitled to redress and will contact customers directly. HSBC has indicated that it expects the cost of redress alone to be £29.3 million.
HSBC agreed to settle at an early stage entitling it to a 30% discount on its fine. It also demonstrated its commitment to making changes to its operations. HSBC closed NHFA to new business on 1 July 2011.
Tracey McDermott, acting director of enforcement and financial crime, said:
“NHFA was trusted by its vulnerable and elderly customers. It breached that trust to sell them unsuitable products. This type of behaviour undermines confidence in the financial services sector.
“HSBC, who owned NHFA, has now recognised the issues and taken steps to do the right thing. They have been given credit for that - but for some customers it will be too late.
“This penalty should serve as a warning to firms that they must have the right systems and controls in place to manage and identify risks when they acquire new businesses. A failure to do so can lead not only to detriment to their customers but to significant reputational and regulatory cost.”
Commenting on the £10.5 million fine, Brian Robertson, Chief Executive of HSBC Bank plc, said:
"I fully accept that NHFA failed to give suitable financial advice to some of their customers. This should not have happened and I am profoundly sorry that it did.
"We have high values here at HSBC and this runs contrary to everything that we stand for. That is why when we suspected something was not right at NHFA, we took action. We advised the FSA of our findings and closed NHFA to new business on 1st July 2011.
"We are undertaking a full review of the advice given to impacted customers and I can guarantee that every customer who is found to have not been treated fairly will not be disadvantaged.
"At this stage NHFA customers do not need to contact us. We will be contacting them directly during the coming weeks with the aim of putting things right as quickly as possible."
Mr Robertson said that the FSA had recognised that HSBC had not only taken significant proactive action to address the problems at NHFA, but had also fully co-operated with the FSA throughout the review.
Background:
- NHFA advisers were not part of the HSBC sales team and they did not advise on any HSBC related products.
- Through a small network of advisers (ranging between 15 to 31), NHFA provided specialist independent advice to a small number of customers on structuring their finances to meet ongoing care costs. This advice was provided by utilising a range of product providers selected to meet the needs of these customers.
- In the majority of cases, sales were made through the customer's families or their representatives. No complaints have been received to date to suggest that any customers have been required to leave their care home as a result of the advice given by NHFA.
- Up until May 2010 NHFA was separately authorised and regulated by the FSA. Once NHFA became part of the HSBC UK Bank operations, and as part of the Bank's regular audit of its sales processes, HSBC found the advice given by some NHFA advisers was inappropriate. At this stage HSBC informed the FSA of its findings.
What should NHFA customers do next?
At this stage, NHFA customers (or their relatives/power of attorneys) should do nothing.
We will shortly be writing to all NHFA customers advising them of the closure of the business. Those customers impacted by the review will be informed within their closure letter and be given details of what will happen next.
