The Financial Services Authority (FSA) has issued its largest ever fine of £10.5 million to HSBC due to one of its subsidiaries, NHFA Limited, providing inappropriate investment advice to its elderly customers.
The amount to be compensated by HSBC in addition to the fine will be approximately £29.3 million. NHFA, which was the leading supplier of UK independent financial advice on long-term care products, advised 2,485 customers entering, or already in, long-term care to invest in asset-backed investment products from 2005 to 2010. It was closed to new business on 1 July.
The FSA said the investment products, typically investment bonds, were recommended to individuals whose life expectancy was below the recommended five-year investment period, and as a result customers with shorter life-expectancies had to make withdrawals sooner than needed.
It added the advice meant clients saw their capital drop more quickly than had they been advised appropriately.
A review by a third party of a sample of consumer files found unsuitable sales were made to 87% of consumers sold these types of investments.
The FSA said it was clear NHFA did not consider the individual needs of its elderly customers and failed to recommend suitable products for their individual circumstances. It also found NHFA's advisers failed to consider the tax status of customers before making a recommendation and there was no consistent approach to assessing customers’ attitude to risk.
'NHFA was trusted by its vulnerable and elderly customers,' said Tracey McDermott, acting director of enforcement and financial crime. 'It breached that trust to sell them unsuitable products. This type of behaviour undermines confidence in the financial services sector.'
The FSA viewed the failings as significant because:
- NHFA's average customer age was around 83, making them particularly vulnerable because of their limited means or inability to make up for 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-leading advice occurred over a period of approximately five years
- A significant number of customers may have suffered financial detriment. The total amount of money invested during the relevant period in asset-backed products was close to £285 million, meaning the average amount invested per customer was approximately £115,000.
According to the FSA, the failings breached its principle nine, which states that a firm must take reasonable care to ensure its advice is suitable and must make discretionary decisions for any customer who is entitles to rely upon its judgment.
McDermott said: '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.'
HSBC has agreed to settle at an early state entitling it to a 30% discount on its fine, as well as making a commitment to changing its operations. The bank acquired NHFA in July 2005 and, until May 2010, the subsidiary was separately authorised and regulated by the FSA.