HSBC faces £40m bill for mis-selling to elderly in care

Elderly person's hands The investment bonds were often sold to those already in care or just going into care

HSBC has been fined £10.5m by the City watchdog for mis-selling investment bonds to elderly people in care.

Some 2,485 customers of the bank's subsidiary NHFA were advised to invest, in order to fund care costs.

Unsuitable sales of this product were made to 87% of NHFA customers, prompting the largest retail fine to date from the Financial Services Authority (FSA).

HSBC will pay £29.3m compensation and said it was "profoundly sorry".

Also on Monday, HSBC said that it would cut 330 jobs in the UK, mainly coming from HSBC's UK commercial banking arm. The bank is also shedding roles in retail banking and wealth and in its technology services.

"Every effort is being made to support impacted employees and redeploy as many people as possible within the bank," said Joe Garner, head of HSBC's UK Bank.

But the union, Unite, told the BBC that the bank had said to it that 551 workers in total would lose their jobs.

"For the hugely profitable HSBC bank to announce 551 job cuts, just three weeks before Christmas, is disgraceful," the union said in a statement.

In August, the bank said it would cut another 25,000 jobs by 2013.

Recommendation

The investments were sold by NHFA advisers, between 2005 and 2010, to people with an average age of 83 who were already in care, or entering long-term care.

Analysis

It is a dark moment for a bank with HSBC's pedigree to have to own up to mis-selling investments to elderly people with only two or three years to live.

HSBC has tried to distance itself from the poor advice given by its subsidiary, NHFA, saying that the advisers involved were not its employees.

Against that many will point to the fact that NHFA was in HSBC's clutches for nearly five years before the wrongdoing was exposed.

And how painful will this record punishment really be?

One leading financial adviser, Roddy Kohn of Kohn Cougar, has pointed out that the commission earned from selling the investments could exceed the value of the £10.5m fine.

Customers typically paid a 5% up front charge for the investments, followed by 1% a year. Apply that to the £285m worth of care plans NHFA sold and you end up with a tidy sum.

They each invested an average of £115,000, and many were reliant on these investments to pay for their care.

Typically, it is recommended that people invest in these products for five years. However, because many had a life-expectancy of less than five years, they started to withdraw from the investments sooner than expected.

The combination of withdrawals and charges meant their capital was eaten away quicker than should have been the case if the products were sold properly.

Advice 'failure'

NHFA was the leading supplier of independent financial advice on products to help pay for long-term care, with a market share of nearly 60%.

HSBC said it identified problems at NHFA, closed the subsidiary to new business in July, and alerted the FSA.

The bank said the problem was with 15 to 31 NHFA advisers who were not employees of HSBC and did not advise on HSBC products.

"I fully accept that NHFA failed to give suitable financial advice to some of their customers," said Brian Robertson, chief executive of HSBC Bank.

"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."

The bank said it would contact those affected in the coming weeks to offer compensation.

Trust 'breached'

HSBC globally reported pre-tax profits for the first six months of the year of $11.5bn (£7bn), up 3% on the $11.1bn the bank made a year earlier.

Recent FSA fines

  • £10.5m: HSBC fined after subsidiary NHFA mis-sold investment bonds to elderly customers
  • £6.3m: Private bank Coutts fined for describing AIG bonds as low-risk
  • £5.95m: UK arm of Credit Suisse fined for advice failures when selling complex financial products

The FSA said HSBC had received a 30% discount on the fine because it settled early, and the bank had demonstrated a commitment to making changes to the operations of NHFA.

"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," said Tracey McDermott of the FSA.

Families or inheritors of the estate of any customers who have died will be contacted by the bank, and any compensation payment due will be paid to them. The bank said it did not know how many of those affected by mis-selling had since died.

Ms McDermott added: "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."

The watchdog said the fine - the fifth largest of any kind levied by the FSA - should serve as a warning to other businesses.

The fine comes a month after private bank Coutts, part of RBS, was fined £6.3m for describing bonds issued by US insurance company AIG as low-risk to 427 well-off customers. They invested £1.45bn but then saw the investments caught up in the uncertainty of the financial crisis when AIG had to be bailed out.

Two weeks earlier, the FSA ordered that the UK arm of Credit Suisse pay a fine of £5.95m for failings over advice to customers when selling complex financial products from January 2007 to December 2009.

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