The Financial Services Authority (FSA) has issued
its largest ever retail fine of £10.5 million to HSBC because of inappropriate
investment advice provided by one of its subsidiaries, NHFA Limited (NHFA) to
elderly customers. HSBC estimates that the amount of compensation to be paid to
NHFA customers will be approximately £29.3 million in addition to the fine.
Between 2005 and 2010 NHFA advised 2485 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.
Typically these investments are recommended for a minimum period of five years.
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% of customers involving these types of
investments.
It was clear that HSBC’s subsidiary, NHFA, had
not considered the individual needs of its elderly customers and failed in many
cases to recommend suitable products for their circumstances. It was also
apparent that NHFA’s advisers failed to consider the tax status of customers
before making a recommendation.
The FSA views the failings as particularly
significant because:
- NHFA’s customer base was particularly
vulnerable. The average customer age was almost 83 and they therefore had
limited means or opportunity to make up 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-conduct occurred over a period of five
years
- A significant number of customers may have
suffered financial detriment.
HSBC agreed to settle at an early stage entitling
it to a 30% discount on its fine. It also demonstrated its commitment to making
changes to its operations. HSBC closed NHFA to new business on 1 July 2011.
Tracey McDermott of the FSA 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.”
Long term care news: 7 December 2011
