HSBC Fined £57.4 Million for Historic Depositor Protection Failings

HSBC Bank plc (HBEU) and HSBC UK Bank plc (HBUK) are confronting a substantial £57.4 million fine from the Prudential Regulation Authority (PRA) for severe depositor protection failings spanning several years. This penalty, the second-highest ever imposed by the PRA, sheds light on HSBC's historical shortcomings in implementing the Depositor Protection Rules. These rules mandate that financial institutions establish robust systems and controls to ensure the accuracy of critical information, crucial for the Financial Services Compensation Scheme (FSCS) to make prompt payments in the event of a firm failure.

The failings, particularly of HBEU between 2015 and 2022 and HBUK between 2018 and 2021, were found to be so significant that they materially undermined the firms' readiness for resolution. The lapse in accurately identifying deposits eligible for FSCS protection and the failure to assign clear ownership for critical processes under the Depositor Protection Rules were among the key violations.

HBEU also faced criticism for not being duly open and cooperative with the PRA, as it failed to alert the regulatory body about problems in the marking of accounts as "eligible" for FSCS protection over a 15-month period. Such information was considered crucial and should have been shared with the PRA in a timely manner.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, highlighted the seriousness of the case, stating that the failings go to the heart of the PRA’s safety and soundness objective. The enforcement action emphasizes the necessity for banks to comply fully with regulatory requirements, particularly those related to preparedness for resolution.

The PRA found that HBEU's failures included incorrectly marking 99% of its eligible beneficiary deposits as 'ineligible' for FSCS protection, providing incorrect attestations to the PRA, and failing to produce finalized versions of annual reports confirming compliance with the Depositor Protection Rules for multiple years.

Despite the severity of the breaches, the Firms' cooperation throughout the investigation secured a 15% reduction in the penalty. Additionally, their commitment to resolving the matter earned them a further 30% reduction in the fine. The PRA clarified that it did not consider the breaches to be deliberate or reckless. This enforcement action underscores the regulatory emphasis on ensuring the safety and soundness of financial institutions.

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