On 21 November 2017, Hong Kong's Securities and Futures Appeals Tribunal fined HSBC Private Bank (Suisse) SA HK$400 million, suspended its license to advise on securities and partially suspended its license to deal in securities, for one year. The previous largest fine was HK$42 million.
The decision related to HSBC Private Bank's sale of complex derivative products (Lehman Brothers equity-linked notes (ELNs) and callable daily accrual notes, and other forward accumulators) in Hong Kong from 2003 to 2008.
The Securities and Futures Commission had originally fined HSBCPB HK$605 million and revoked its type 1 license (dealing in securities) in part and its type 4 license (advising on securities) in full.
While SFAT reduced the fine and converted the revocations to suspensions, it confirmed that the private bank was guilty of misconduct attributable to systemic failures. Those systemic failures related to identifying client risk appetite, matching client risk to product risk, record-keeping of risk identification and suitability checking, and informing clients of product and issuer risks (including that products were issued by Lehman Brothers).
Crucially, although disagreeing that the SFC could impose more than one fine for each systemic failure, SFAT confirmed the regulator could multiply the fine for each systemic failure by the number of legitimate complaints concerning that failure (HK$5 million x 83).
SFAT also reiterated that intermediaries cannot avoid, or "contract out" of, regulatory obligations through their customer agreements and emphasised the decision should be a "stern warning" to registered institutions to adhere to the principles of professional conduct.
HSBCPB may yet appeal to the Court of Appeal, although it has announced that its Hong Kong private banking operations are now carried out by an entity unaffected by the suspension. The SFC has also already introduced a mandatory obligation that client agreements provide for suitability of recommendations and solicitations, which came into full effect from 9 June 2017.
The decision will nonetheless raise heads by the sheer level of the sanction, particularly given the outcome of previous investigations into the sale of Lehman Brothers products. Many investigations were settled with no sanction in exchange for the distributor agreeing to buy back the products. One investigation was resolved by the imposition of a much smaller fine of HK$4.5 million and no suspension of licence (for failings in the sale of Lehman Brothers ELNs to 10 clients) – the SFC stated at the time that this fine was intended as a "strong deterrent message".
The previous largest fine imposed by the SFC was HK$42 million for a failure to discharge listing sponsor duties.
The decision will also cause concern to many intermediaries, particularly those with ongoing investigations, by its confirmation that the SFC can use a multiplier (here, the number of complaints) in calculating future fines.