British banks face yet more bills, this time for poor advice to customers

PUBLISHED : Tuesday, 05 November, 2013, 10:39am
UPDATED : Tuesday, 05 November, 2013, 10:39am

HSBC has set aside US$149 million to review how it advised about 200,000 British customers on investing a lump sum of money, the first British bank to do so and signalling another potential costly mishap for lenders.

HSBC chief executive Stuart Gulliver said on Monday about US$120 million of the money set aside will pay for the cost of its review, indicating only a fifth of the provision had been earmarked for customer compensation.

It follows a “mystery shopper” undercover review by Britain’s financial regulator that checked on investment advice at six major lenders. Among the findings, released in February, were that unsuitable advice had been given 11 per cent of the time and that firms did not gather enough information in a further 15 per cent of cases.

One of the companies was put under investigation for possible investment advice failures, which could result in a fine. That firm was Santander UK, four industry sources said at the time.

HSBC is the first bank to specifically set aside money for the issue, included in its third-quarter results.

“The Financial Conduct Authority [FCA] has said that suitability failures have been widespread in the industry, so it is unlikely that HSBC are alone,” said Rob Moulton, a partner at law firm Ashurst.

The Financial Conduct Authority has said that suitability failures have been widespread in the industry, so it is unlikely that HSBC are alone
Lawyer Rob Moulton

The regulator’s study concluded that banks should review their past business “to identify [historical] poor advice and put this right for customers”. Banks were told to employ an independent company to carry out or oversee the work.

HSBC hired Grant Thornton to review its sales.

“The outcome of that is we need to go back to 2008 and check how we sold wealth management products to about 200,000 clients,” Gulliver said.

He said his bank was being “prudent” by stripping out the operational cost of doing the process. It was not clear if other banks faced similar costs and, if so, would strip them out or just include them in routine operational costs.

Santander UK, Lloyds Banking, Barclays, RBS and Nationwide declined comment. The FCA did not name the six banks in its review and said the scale of poor advice varied significantly. The authority declined to comment on its work.

Any compensation or operational costs would add to the more than £20 billion (HK$247 billion) set aside by Britain’s big lenders in recent years to compensate customers for mis-sold payment protection insurance (PPI), the costliest scandal to ever hit the industry, and for mis-sold interest rate hedging products.

HSBC’s provision was part of US$428 million it set aside in the latest quarter for UK customer redress.

British banks have restructured their wealth management operations and most only offer advice to customers with over £50,000 to invest, following new rules introduced this year aimed at ensuring advisers are better trained and fees for financial advice are more transparent.

Lawyers said the FCA, faced with spiralling demands on its resources, is increasingly using its powers to force firms to pay for reviews in a more interventionist approach to protect consumers.