HSBC Private Bank (Suisse SA) is appealing against the HK$605m ($77.9m) fine and the revocation of its advisory license by the Hong Kong Securities and Futures Commission (SFC) over the bank's internal controls and sales practices in connection with its sale of Lehman Brothers-related notes and leveraged forward accumulators between 2003 and 2008.
An HSBC spokesperson confirmed that lawyers representing the bank began yesterday (May 4, 2016) proceedings to challenge the SFC penalty and the alleged mis-selling of structured products to HSBC's private banking clients which was announced in July 2015 by the Hong Kong watchdog.
"Certain issues concerning the distribution of structured products by HSBC Private Bank (Suisse) SA, Hong Kong branch prior to 2009 have been investigated by the Securities and Futures Commission (SFC)," said the spokesperson. "HSBC has applied to the Securities and Futures Appeals Tribunal (SFAT) for a review of the SFC's findings resulting from its investigations. As the appeal is pending, we are unable to comment further."
Anthony Neoh (pictured), formerly chairman of the SFC who is acting as counsel for HSBC Private Bank (Suisse) SA argued during the public hearing that the penalty could not be justified, that the bank could not forecast the bankruptcy of Lehman Brothers in September 2008 as the US investment bank had a high credit rating until it went into liquidation, and that the regulator was wrong not to consider the contractual relationship between the bank and its clients pointing that the nature of a private-banking relationship is different to that of a bank and a retail customer in that private banks have minimum requirements on client's wealth and investible assets.
As announced by the SFC, the public hearing which is being held by the chairman of the SFAT, Mr Justice Hartmann, will resume tomorrow (May 6) and continue at least until mid-May (May 12). This is the latest case involving a foreign financial institution, and follows an agreement by the SFC and the Hong Kong Monetary Authority (HKMA) with RBS in relation to the sale of Lehman Brothers-backed equity-linked notes (LB-ELNs) to retail clients between July 2007 and May 2008.
In the summer of 2012, the HKMA announced that there were only a few dozen cases left of alleged mis-selling by financial institutions of structured products linked to Lehman Brothers, after a three-year probe instigated by 21,865 complaints.
Earlier, in February 2012, the HKMA had relaxed its $1m asset rule as well as requirements for private banks and authorised institutions separate sales and client assessments when dealing with private banking clients, a revision that came three years after the regulator published its "enhanced measures for the sale of investment products" in the wake of the Lehman Brothers collapse.
The SFC released a circular in March 2015 aimed at distributors of SFC-authorised unlisted structured investment products to clarify acceptable practice in the early stages of product lifecycles and also governance during the creation process and post-trade, which followed (December 18) the regulator's conclusions from the Client Agreement Requirements consultation in which it proposed amendments to the professional investor regime and new suitability provisions for financial advisors.
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