The FSA has issued its largest ever retail fine of £10.5m against HSBC because of inappropriate investment advice provided by one of its subsidiaries to elderly customers.
HSBC estimates that the amount of compensation to be paid to Nursing Homes Fees Agency customers will be approximately £29.3m in addition to the fine.
Between 2005 and 2010 HSBC subsidiary 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.
The average age of NHFA’s customer base was almost 83. The total amount invested was close to £285m, putting the average amount invested per customer at approximately £115,000.
In June, HSBC announced it was to close NHFA to new business as it “no longer forms part of the group’s strategic direction”.
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 per cent of customers involving these types of investments.
The FSA says it was clear NHFA had not considered the needs of its elderly customers and failed in many cases to recommend more suitable products such as higher fixed interest rate savings accounts or Isas. NHFA also failed to consider its customers tax status.
NHFA’s market share of the long-term market was nearly 60 per cent, in the years leading up to the subsidiary’s closure in June.
The misconduct occurred over a period of five years.
FSA acting director of enforcement and financial crime Tracey McDermott says: “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.”
HSBC chief executive Brian Robertson says: “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 July 1, 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.”
HSBC will be writing to existing NHFA customers advising them of the closure of the business. Customers whose files are being reviewed will be informed within their letter, and HSBC will write to customers again to let them know the outcome of the review.