UK regulator fines HSBC £57 million for deposit protection issues

Rick Steves

“The serious failings in this case go to the heart of the PRA’s safety and soundness objective. It is vital that all banks comply fully with our requirements around preparedness for resolution.”

The UK Prudential Regulation Authority (PRA) has imposed a fine of £57,417,500 on HSBC Bank plc (HBEU) and HSBC UK Bank plc (HBUK) for significant failures in deposit protection.

These failures, spanning several years, involved inadequate implementation of Depositor Protection Rules, crucially failing to correctly identify deposits eligible for Financial Services Compensation Scheme (FSCS) protection.

The period of these failings extended from 2015 to 2022 for HBEU, and from 2018 to 2021 for HBUK. This fine represents the second highest ever levied by the PRA, highlighting the gravity of the Firms’ failings.

The Depositor Protection Rules mandate that firms maintain robust systems, controls, and governance to safeguard critical information necessary for the FSCS to promptly compensate depositors in the event of a firm’s failure. HBEU’s shortcomings were so severe that they significantly compromised the firm’s preparedness for resolution. Additionally, HBEU was found to have failed in its obligation to be open and cooperative with the PRA, particularly by not reporting identified issues in a timely manner.

These breaches included violations of Fundamental Rules 2 and 6, as well as Depositor Protection Rules 11, 12, and 14. Furthermore, HBEU breached Depositor Protection Rule 50 and Fundamental Rules 7 and 8, marking the first enforcement action by the PRA concerning Fundamental Rule 8. This rule mandates that firms be prepared for resolution to minimize disruption of critical services.

Fine reduced from £96.5 million originally

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said: “The serious failings in this case go to the heart of the PRA’s safety and soundness objective. It is vital that all banks comply fully with our requirements around preparedness for resolution. HBEU fell far short of its obligations in this area, and failed to disclose its failings to us in a timely manner. These failures led to today’s action, including the significant fine.”

The Firms’ failings included poor ownership assignment for processes under the Depositor Protection Rules and lack of senior manager responsibility for these processes. HBEU specifically erred in incorrectly marking 99% of its eligible beneficiary deposits as ‘ineligible’ for FSCS protection, providing incorrect attestations to the PRA, and failing to produce finalized annual compliance reports.

Despite these failings, the Firms’ cooperation during the investigation and early admission of certain breaches resulted in a 15% reduction in the penalty. A further 30% reduction was applied for agreeing to resolve the matter, reducing the potential fine of £96.5m.

In a related development, the Bank of England, along with the PRA, published Policy Statement PS1/24, outlining revised enforcement approaches for PRA firms and financial market infrastructure firms. These revisions aim to encourage early cooperation and admissions, expediting investigations where appropriate. The fine imposed on HBEU and HBUK was under the PRA’s pre-existing penalty policy, with plans to consult on further amendments to enforcement policies in 2024, in line with the powers granted under the Financial Services and Markets Act 2023.

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