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HSBC Private Bank Hong Kong Fined HK$400 Million for Derivative Products Sold Between 2003 to 2008

HSBC Private Bank (HK) had been fined a record HK$400 million for systemic failures for its sale of derivative products between 2003 to 2008.  The private bank had not disclosed to its clients the exposure Lehman Brothers it the products and the increasing credit risks of Lehman Brothers prior to the 2008 global financial crisis.

” HSBC Private Bank Hong Kong fined HK$400 million for Lehman Notes & Accumulators “

The derivative products includes Lehman Brothers-related Notes sold between 2006 to 2008 (3,961 transactions, HK$12.1 billion nominal value, HK$94.6 million revenue) and Leveraged Forward Accumulators sold between 2003 to 2008 (17,034 series, HK$2.19 billion revenue).

The HK$400 million fine is concluded (reduced from HK$605 million) after the Securities and Futures Appeals Tribunal (SFAT) reviewed and upheld the Securities and Futures Commission disciplinary action against the private bank.  The private bank is also suspended for Type 4 activity (advising on securities) for one year, and partial suspension for Type 1 (dealing in securities) for one year.

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The case was referred to the SFC by the Hong Kong Monetary Authority (HKMA) following its investigation into issues arising from numerous complaints.

Securities and Futures Appeals Tribunal (SFAT) comments:

The bank’s culpability was “extensive, putting many clients at unnecessary risk of loss and indeed resulting in substantial losses for many.”  A fine of HK$400 million 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.”

Mr Ashley Alder, the Securities and Futures Commission’s Chief Executive Officer:

“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.”

Lehman Brothers-related Notes

By the summer of 2008, the financial crisis was increasingly alarming.  HSBC Private Bank (Suisse) SA was aware of the deteriorating financial condition and credit quality of Lehman Brothers and had itself materially reduced its exposure to Lehman Brothers (Note 8).

Nevertheless, HSBC Private Bank (Suisse) SA continued to sell the LB-Notes to its clients until 3 September 2008, i.e. two weeks before the collapse of Lehman Brothers, and did not disclose to its clients that the LB-Notes were issued by Lehman Brothers nor warned its clients about the increasing credit risk of the LB-Notes during the sales process (Notes 9, 10 & 11).

It was also found that in over 80 per cent of the outstanding LB-Notes transactions, there was a mismatch between the client’s risk tolerance level and the risk rating assigned by HSBC Private Bank (Suisse) SA to the relevant LB-Notes, with clients who were categorised with “low” or “medium” risk tolerance levels purchasing LB-Notes rated the riskiest by HSBC Private Bank (Suisse) SA.  HSBC Private Bank (Suisse) SA did not keep adequate or proper records of justification for these risk-mismatch transactions (Notes 12, 13 & 14).

Leveraged Forward Accumulators

In distributing FAs to clients between January 2003 and December 2008, the SFC found that HSBC Private Bank (Suisse) SA failed to implement adequate systems and controls to prevent clients from being overly exposed to FAs and to ensure that clients had sufficient financial resources to assume the risks of trading in FAs even though FAs were at the time assigned internally the highest risk rating.

Under HSBC Private Bank (Suisse) SA’s own in-house policy during the relevant period, a client should not be advised to invest more than 10 per cent of his/her portfolio held with the bank in any single structured product, or more than 5 per cent of the portfolio if the investment was considered to be high risk.  However, the SFC’s investigation revealed that HSBC Private Bank (Suisse) SA had dis-applied this policy in the sale of FAs despite being considered as a high risk product by the bank.  HSBC Private Bank (Suisse) SA did not substitute this in-house policy with any other suitable policy to prevent clients from being overly exposed to FAs and to ensure that clients had sufficient financial resources to bear the potential losses of trading in FAs at the time of entering into the trade.

Source: Official Press release

About HSBC



The Hong Kong and Shanghai Banking Corporation Limited(NYSE:HSBC) was established in 1865 to finance the growing trade between Europe, India and China. HSBC was born from one simple idea – a local bank serving international needs. Today, it covers 71 countries and territories in Europe, Asia, the Middle East and Africa, North America and Latin America with around 4400 offices in both established and emerging markets, serving around 46 million customers through the Four Global Businesses: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, and Global Private Banking.

  • Origin : London, UK
  • Assets : Euro 21.67 billion
  • Revenue : Euro 721.3 million
  • Employees : 266,000

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News & Media: Press Release

Updated on 8th August 2016 | The leading financial website for financial professionals, professional investors and HNW investors. Covering capital markets, investments and private wealth in Asia. How do you invest $3 million to $300 million? How do you manage $20 million to $3 billion of assets? Quicklinks: Caproasia Access | TFC | Caproasia | Jobs

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