Banking giant HSBC has been fined £10.5 million for mis-selling investment products to elderly customers.
This is the largest ever fine handed out to a retail bank by industry regulator, the Financial Services Authority (FSA).
It ruled that HSBC subsidiary NHFA Limited gave inappropriate investment advice to pensioners seeking to fund their long-term care needs.
This resulted in pensioners investing money for a longer period than they were expected to live.
The amount of compensation to be paid to affected customers will be approximately £29.3 million on top of the fine, HSBC has estimated.
Unsuitable financial advice
NHFA was the leading supplier in the UK of independent financial advice on long-term care products to help pay for care costs, with 60 per cent of the market place.
Between 2005 and 2010, NHFA advised 2,485 customers to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs.
The total amount invested was close to £285 million, meaning the average amount invested per customer was approximately £115,000.
With investment bonds, a lump sum is invested for the customer until the bond is either cashed in or until the customer’s death.
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.
Loss of money
Typically these investments are recommended for a minimum period of five years.
But in a number of cases the customer’s life expectancy was less than five years, so they ended up making withdrawals from the investments before the five years were up.
The combination of withdrawals and product charges led to a faster reduction of the lump sum invested meaning the customer lost money on what the investment should have paid out.
Confidence in banks "undermined"
An investigation found unsuitable sales had been made to 87 per cent of customers involving these types of investments.
The FSA found that NHFA had not considered the individual needs of its elderly customers and failed to recommend more suitable products such as higher fixed interest rate savings accounts and ISAs.
Tracey McDermott, acting director of enforcement and financial crime at the FSA said the bank’s behaviour undermined confidence in the banking sector.
Vulnerable customers
McDermott added: “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.
“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.”
The FSA said the failings were particularly significant as elderly customers were vulnerable.
The average customer affected was almost 83 years old and therefore had limited means or opportunity to make up any financial loss resulting from an unsuitable sale.
HSBC closed NHFA to new business on 1 July 2011 and is carrying out a review to determine if customers or their families are entitled to redress and will contact customers directly.
