HSBC put aside $550 million at the end of last year in preparation for future foreign exchange fines, just after paying out $611 million to UK and US regulators a month earlier, according to the bank’s 2014 annual report.
In November, the bank – alongside Citi, JP Morgan, Royal Bank of Scotland and UBS – agreed a settlement with the Financial Conduct Authority and the Commodity Futures Trading Commission over alleged FX market manipulation. HSBC arranged to pay a financial penalty of $336 million to the FCA and a civil monetary penalty of $275 million to the CFTC, and also to undertake various remedial actions.
HSBC, along with 11 other banks, still faces various private lawsuits filed in the New York District Court over allegedly manipulating the WM/Reuters FX benchmark rates by sharing customers’ confidential order flow information. In January the court dismissed actions brought by non-US plaintiffs; however it denied the defendants’ motion to dismiss the US plaintiffs’ class action suit.
The annual report emphasises there remains a high degree of uncertainty as to the terms on which these issues will be resolved and the timing of such resolutions, including the amounts of fines and/or penalties, which could be “significant”.
In relation to the settlements, Stuart Gulliver, group CEO, says, “HSBC was badly let down by a few individuals whose actions do not reflect the vast majority of employees who uphold the values and standards expected of the bank. This matter is now rightly in the hands of the Serious Fraud Office.”
HSBC reported profit before tax of $18.7 billion, which was $3.9 billion lower than it achieved in 2013. It attributed the 17% drop to “lower business disposal and reclassification gains, and the negative effect, on both revenue and costs, of other significant items including fines, settlements, UK customer redress and associated provisions.”
In detail, the latter includes charges relating to UK customer redress of $1.3 billion; settlements and provisions in relation to regulatory investigations into foreign exchange of $1.2 billion, of which $809 million was recorded in the fourth quarter of 2014; and provisions arising from the ongoing review of compliance with the Consumer Credit Association (CCA) in the UK of $632 million.
In addition to being hit by regulatory fines, the FX group within the bank experienced a reduction in revenue and markets, according to group finance director Iain Mackay. One bright spot in FX was an increase in renminbi (RMB) revenue and volumes, as a result of the global expansion of RMB.
In order to strengthen its compliance unit, HSBC completed a restructuring within global risk in 2014, dividing compliance into two new sub-functions: financial crime compliance and regulatory compliance. Since 2011 compliance staff headcount has more than doubled at the bank, according to Gulliver.
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