After some digging by an intrepid journalist at The Guardian through third quarter results published yesterday (4 November), it has been revealed that high street banking group HSBC has added a third line to its redress provision to cover investment advice mis-selling.
Look at the results and you’ll see $149m (£93m) has been allocated in the quarter to cover compensation for advice failings undercovered by the Financial Conduct Authority as part of a mystery shopping exercise last year.
That’s a sizable provision: it’s larger than the $132m (£83m) set aside to cover redress for mis-selling of interest rate hedging products and the $147m set aside in the third quarter for payment protection insurance compensation - though the total for 2013 for PPI now stands at $514m (£322m).
This, however, is surely just the tip of the iceberg; probably for HSBC itself, definitely for the sector as a whole.
HSBC is actually the only bank to come out and say what it has set aside for its investment advice failings following a mystery shopping exercise carried out by the then Financial Services Authority, which reviewed practices at six major retail banks between March and September 2012 and published findings nine months ago in February.
That the regulator published the findings of a mystery shopping exercise publicly was significant in itself - it hadn’t done so since a previous probe into sales of PPI was published in September 2008. It decided to go public because the results were so damning.
The regulator found 25 per cent of investment advice given by banks and building societies across 231 mystery shops was of questionable quality. In 15 per cent of cases the adviser did not gather enough information to ensure advice was suitable; in 11 per cent unsuitable advice was confirmed as having been given.
Given the billions of pounds worth of sales these major banks will have transacted, we’re talking big money here. The Guardian suggests that 200,000 people were mis-sold by HSBC, which might imply that the £93m so far set aside will grow substantially before all is said and done.
Moreover, there were six major retail banking firms included in the exercise and we are yet to see any word from HSBC’s rivals about what their compensation bills are likely to be.
One of the banks included was referred to the regulator’s enforcement division, but there is as yet no word on whether any action will be forthcoming.
This was believed to be Santander, which announced a suspension of its bancassurance division just hours after the FSA published the review and later confirmed it would close the arm. Santander has yet to confirm what provision it has earmarked for redress.
As for the other four banks? We don’t know yet. A slew of bank interim announcements recently has offered no insight from the big names to suggest they are gearing up to make similar payouts.
And this review is not the end of the story in any case.
For HSBC, it is the latest in a long line of bills it has racked up relating to various scandals it has become embroiled in.
In 2005, it was fined £100,000 for failing to ensure the accuracy of transaction reports it made to the FSA between 2002 and 2005, while in June 2011 the bank announced that it will close its care home advice business, the Nursing Homes Fees Agency (NHFA), after it was hit with the largest ever retail fine of £10.5m.
That is not to mention the $1.9bn (£1.2) HSBC agreed to pay US regulators over failure to comply with money laundering regulations, or the $2.5bn (£1.6bn) in fines it has been slapped with over mortgage-backed securities that it has vowed to fight.
Beyond HSBC and back to world of investment advice at home, in September Axa Wealth was hit with a £1.8m fine by the Financial Conduct Authority for failing to ensure it gave suitable investment advice to its customers.
According to an FCA notice, the firm put customers at risk of buying unsuitable products between September 2010 and April 2012, during which time approximately 37,0000 Axa investment products to 26,000 retail customers of Clydesdale Bank, Yorkshire Bank and the West Bromwich Building Society.
In my view it is clear that there was a cultural issue at HSBC and that failures were systemic. They’ve racked up massive fines and redress costs as it is and I’d expect the payouts for investment advice in particular to get higher yet.
When the other banks finally reveal what they are setting aside, the total costs will spiral to eye-watering levels.
That’s bad news for them, but also for the sector. I don’t know about you but if a glut of headlines mean ‘investment advice’ becomes synonymous with mis-selling in an even remotely similar way to what has happened with PPI, the ripple effects will be widely felt.
