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Regulation

Explainer: What are some of the main things banks have been fined for?

Most fines paid by banks since the global financial crisis have concerned four areas of malpractice

PUBLISHED : Saturday, 21 October, 2017, 11:31am
UPDATED : Sunday, 22 October, 2017, 11:31am

Since the global financial crisis banks around the world have paid out around US$342 billion in fines and settlements, according to data from Hong Kong consulting firm Quinlan&Associates. Most of these payments have concerned malpractice in four main areas.

Residential mortgage-backed securities malpractice

More than half of the fines levied on banks by global regulators are related to the creation and sale of toxic mortgage-backed securities, primarily by US regulators.

The US Department of Justice has handed out US$73 billion dollars in fines for wrongdoing in this area, one important component in the global financial crisis.

The largest payout so far has been Bank of America’s US$16.7 billion fine in 2014, to resolve claims made against it and its subsidiaries, though the other major Wall Street banks have also paid billion-dollar fines as have some European banks.

Banks packaged residential mortgages into securities that they then sold on to other investors.

The fines relate to banks misrepresenting the quality of the mortgages on which the securities were based in their conversations with investors

Mis-selling of products

The largest fines for mis-selling have been levied in the UK, where banks sold payment protection insurance alongside mortgages and other loans. The insurance was supposed to cover payments should customers be unable to meet repayments on their loans, but in a number of cases customers did not know they had bought it, or that had they met the requirements they would have been unable to make a claim. The UK’s four largest high-street banks have all paid large fines, but Lloyds’ has paid the most, and HSBC the least, according to S&P.

In the United States, Wells Fargo has also paid substantial fines for signing customers up to accounts and other services that they did not want.

Market manipulation

Banks have been fined substantial sums for fixing benchmark lending rates as well as foreign exchange rates and, in some instances in the UK, individual bankers have been sent to prison.

The Libor rate was used to price a wide variety of financial products, though it is now being phased out. Other benchmark rates include Euribor, Tokyo’s Tibor, Singapore’s Sibor and Hong Kong’s Hibor. Banks have been fined for conspiring to fix most of these rates, though an investigation by the HKMA into Hibor fixing only identified wrongdoing at UBS, which the regulator said had promptly taken appropriate follow-up actions, and did not issue a fine.

Most recently, this month Citigroup, Deutsche Bank and HSBC Holdings agreed to pay a combined US$132 million to settle a US class action brought by futures traders accusing them of manipulating the Libor benchmark interest rate.

Banks have also been fined for conspiring to fix currency rates, for which they have been fined a total of around US$10 billion by regulators, according to Reuters, as well as paying out to various class actions. Former HSBC executive Mark Johnson, accused of a scam in the foreign exchange market, is currently on trial in the US. Johnson pled not guilty, and the trial is ongoing.

Anti-money-laundering breaches

“Anti-money-laundering and sanctions rules are the largest concern for banks doing business in Hong Kong,” said Etelka Bogardi, a partner at law firm Norton Rose Fulbright in Hong Kong. On Thursday, a British politician urged Hong Kong regulators to look into his concerns that banks in the city had processed money linked to wrongdoing in South Africa, and earlier this year the HKMA, Hong Kong’s de facto central bank, fined private bank Coutts HK$7 million (US$900,000) for anti-money-laundering breaches.

Some of the largest banks in Hong Kong have also been fined substantial sums for such breaches elsewhere.

HSBC and Standard Chartered are subject to deferred prosecution agreements in the US and monitors have been placed by the US Department of Justice and the New York Department of Financial Services in the banks to track their progress towards meeting appropriate anti-money-laundering standards.

Standard Chartered’s deferred prosecution agreement was put in place in 2012 as part of a US$667 million payment for breaches of anti-money-laundering and sanctions rules with regard to Iran. A further penalty of US$300 million was levied on the bank in 2014, and the monitor’s term was extended to 2018.

HSBC’s deferred prosecution agreement was also agreed in 2012, as part of a US$1.9 billion settlement for violations of anti-money-laundering rules regarding Mexican drug cartels.

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