Hang Seng Bank has been fined HK$66.4 million by the Hong Kong Securities and Futures Commission (SFC) for overcharging clients during the sale of investment products. This penalty marks a significant step taken by the authorities to address serious regulatory failures within the bank's operations.
The SFC's disciplinary action is the result of thorough investigations conducted alongside the Hong Kong Monetary Authority (HKMA). The findings revealed serious concerns over Hang Seng Bank's sale of Collective Investment Schemes (CIS) and derivatives, which spanned nearly nine years, from February 2014 until May 2023. The SFC identified several instances where clients incurred excessive trading costs due to HSB's recommendations and practices.
During the investigation, it was uncovered how 111 client accounts executed over 100 transactions each of CIS products within specified periods. While many transactions carried the label of “the client’s own choice,” it was shown through evidence how 46 clients had their trading influenced significantly by their relationship managers, with many being encouraged to engage in frequent, short-holding trades.
These practices not only aligned poorly with the funds' investment objectives but also contradicted the clients' preferred investment horizons. Consequently, this frequently resulted in heightened transaction costs, dramatically impacting clients' financial performances and profit margins.
Additional revelations during the investigations highlighted failures on the part of HSB’s internal controls. The bank lacked sufficient oversight to manage the trading activities of its clients and did not maintain proper audit trails, leading to inadequately substantiated transactions. This oversight failure allowed clients who were not sufficiently knowledgeable about derivatives to participate in unsuitable investments.
From February 2014 to December 2018, the SFC noted instances where financial products with risk levels exceeding clients' risk tolerance were sold to 388 clients, leading to concerns about HSB's compliance with regulatory norms.
Throughout the investigation, the SFC found multiple instances where Hang Seng Bank retained monetary benefits improperly, charged clients higher transaction fees than previously disclosed, and inadequately communicated about fee arrangements tied to investment fund trading. Specifically, this misconduct resulted in HSB profiting at least HK$22.4 million from client transactions.
Christopher Wilson, SFC’s executive director of enforcement, described the bank’s transgressions as not just isolated incidents but indicative of systemic issues within its operations. "HSB’s misconduct was serious and systemic. Clients, who believed they were making independent investment decisions, were actively solicited by HSB’s relationship managers for frequent and excessive CIS transactions. This led to substantial transaction costs borne by the clients, harming their financial interests," he stated.
Echoing these sentiments, Raymond Chan, executive director of enforcement and Anti-Money Laundering at the HKMA, emphasized the collaborative nature of the investigations between the HKMA and SFC, stating, "This enforcement outcome signifies the importance of having adequate systems to comply with regulatory standards across the industry." The message from these regulatory bodies is clear: compliance must be prioritized to safeguard clients’ interests.
While these developments have unfolded, the broader market has had its own set of dynamics. The Hang Seng Index, following recent market fluctuations, closed at 20,325 points, reflecting cautious optimism among traders even amid serious revelations about one of its prominent banking institutions. Analysts remain vigilant, indicating immediate support at 19,300 points but with existing resistance at 20,500 points. They caution traders to maintain short positions until positive momentum can be definitively established, especially with the HSB situation still casting uncertainty.
Moving forward, the case of Hang Seng Bank serves as both a reminder and warning for institutions operating within the financial sector. Robust measures of internal compliance and honest communication are not just regulatory requirements; they are instrumental to maintaining trust and integrity within the financial markets. This significant enforcement action against HSB reveals the potential for serious repercussions associated with lapses in fiduciary responsibility to clients.