HSBC Fined £10.5 million for NHFA’s inappropriate advice to the elderly

News just in. HSBC has just been handed a £10.5 million fine from the FSA for giving poor advice to the elderly. This is the biggest fine ever given to retail bank by the FSA. Further to this fine HSBC is expected to have to pay out a total of £29.3 million to resolve the whole issue.

The inappropriate advice was given by on of HSBC’s subsidiaries, according to the FT today. The subsidiary under the spotlight is NHFA Limited who advised 2485 customers between 2005 and 2010 to invest in asset-backed investment products.

The problem was that for many of the people receiving investment advice, their life expectancy was already below that of the period for a return on the investment (typically 5 years). Many customers were forced to make early withdrawals which led to a rapid reduction in their capital investments.

In an independent review of investment advice it was found that 87% of customers had been given unsuitable advice, or at least had made unsuitable investment decisions for their own personal situation.

Also the FSA have said that it appears that NHFA advisers did not take into account the tax status of investors before giving their financial advice.

Elderly customers at most risk

The NHFA had a very old customer base, with an average age of 83 years. This meant that there was a much greater risk of the investment vehicles that were being sold would be unsuitable, as it is generally expected that most of the investors will not live until the end of the period.

The total investments declared inappropriate by the FSA came to £285 million, which represents around £115,000 per investor.

Beach of Principle 9

The FSA have stated that the failing were in breach of “principle 9” which should ensure that investment advisers consider the personal circumstances of an investor before making a recommendation.

HSBC have taken action to correct the mistakes made and the NHFA has been closed to new business since July 2011.

Warning to Investment Advisers

Tracey McDermott, the acting director of enforcement and financial crime at the FSA has said that this fine will hopefully set an example to other investment advisers;

“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.” Tracey McDermott, FSA, 2011.

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