HSBC fined £57M by the PRA over historic deposit protection failures
The PRA has imposed a financial penalty of £57,417,500 on HSBC Bank PLC (HBEU) and HSBC UK Bank PLC (HBUK), for historic deposit protection failings. The firms failed to implement the Depositor Protection part of the PRA Rulebook (the DP Rules) by inaccurately identifying deposits that were eligible for protection under the Financial Services Compensation Scheme (FSCS).
The firms’ cooperation, including the early admission of certain rule breaches, resulted in a 15% reduction of the penalty, and their agreement to settle at an early stage meant they qualified for a further 30% discount. Without these reductions the fine would have been £96.5m. Nevertheless, it remains the second highest fine imposed by the PRA, eclipsed only by the £87m fine imposed on Credit Suisse in July 2023.
The FSCS and the DP Rules
Eligible deposits held by UK banks under the FSCS are protected up to a limited of £85,000 (£170,000 for joint accounts). This means the FSCS would repay depositors the first £85,000 of their deposits in the event their bank fails. Eligible and potentially eligible deposits must be marked as such. Ineligible deposits include sums deposited by credit institutions, investment firms, financial institutions or where the deposit holder’s identity has not been verified.
The ability of the FSCS to make timely pay outs to depositors is dependent on firms accurately identifying and marking deposits as eligible, potentially eligible or ineligible, and being able to provide this information to the PRA and the FSCS in a timely way. The PRA sets out requirements for regulated firms concerning the production of this information in the DP Rules. In particular, under the DP Rules firms must maintain a ‘Single Customer View’ (SCV) which is a single, consistent view of a depositor’s aggregate eligible deposits within a firm, plus related analysis and reports.
Details of the breaches
The firms’ breaches included:
- Not marking eligible deposits in a way that would allow for their immediate identification as eligible or potentially eligible and, in the case of HBEU, incorrectly marking 99% of its eligible deposits as ineligible for FSCS protection;
- Failure to produce finalised SCV reports on an annual basis;
- Inaccurate attestations that the relevant systems met the PRA’s requirements;
- Failure to assign clear ownership for the processes required under the DP Rules; and
- Failure to ensure that a senior manager under the Senior Managers and Certification Regime (SMCR), was allocated responsibility for these processes and the integrity of the information required under the DP Rules.
The PRA also found that governance shortcomings were an important contributing factoring. In particular, the Final Notice highlighted that the internal working group established to investigate whether deposits were being correctly reported was governed informally, minutes were not properly taken, and members of the working group gave conflicting accounts of its objectives and who was accountable for the group’s work.
The PRA also found that HBEU had failed to disclose information to it “which it would have reasonably expected notice”. This was due to a 15-month delay between the firm becoming aware of information which reasonably suggested it may have been mislabelling its deposits and its notification to the PRA.
These failings meant the firms breached PRA Fundamental Rules 2 and 6, as well as DP Rules 11, 12 and 14. HBEU was also found to have breached DP Rule 50, and Fundamental Rules 7 and 8. This is the first PRA enforcement action where a breach of Rule 8 has been found.
| PRA Fundamental Rules
PRA FR2: A firm must conduct its business with due skill, care and diligence.
PRA FR6: A firm must organise and control its affairs responsibly and effectively.
PRA FR7: A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
PRA FR8: A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.
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The PRA found that the firms’ failure to accurately identify eligible deposits and generate reliable SCV data undermined its readiness for resolution and in doing so it increased the potential risk to the wider UK financial system by undermining FSCS protection.
The Final Notice provides a reminder to all banks with FSCS-eligible deposits:
- To reassess the views they have taken on the interpretation and operation of the DP Rules, particularly where those views could affect the eligibility of deposits; and
- To ensure that the governance arrangements they have in place for compliance with the DP Rules are clear, and that they are devoting adequate resources to discharging their obligations under these rules.
Recent News
SFO Update: Another raid by the SFO in new fraud investigation; Former Petrofac senior executives charged with bribery; Nick Ephgrave delivers first public speech as director
On 21st February the SFO announced it had raided three residences and made four arrests as part of a new fraud investigation into property management company Signature Group. The company bought buildings in the UK for redevelopment into hotels, residential apartments, and offices spaces. The business attracted more than 1000 investors from the UK and abroad with promised returns of between 8% and 15%. The business went into administration in 2020, with losses of up to £140m. The investigation into Signature Group is the fourth to be launched by the SFO since Nick Ephgrave took over as director and follows a recent spate of dawn raids by the agency.
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On 13th February, Nick Ephgrave gave his first public speech as Director of the SFO. He outlined the SFO’s priorities for the future and plans to meet the challenges facing the agency. The key takeaways from the speech were:
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- Collaborator of choice: Ephgrave also said he wants the SFO to be the “collaborator of choice” for other law enforcement agencies both in the UK and abroad.
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Power Without Responsibility – New Report by Spotlight on Corruption
On 7th February, Spotlight on Corruption published a new report which raised concerns that UK enforcement authorities are struggling to successfully prosecute senior executives for economic crime. The report reveals that:
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OFSI Update: Guidance Published on Ransomware and Sanctions
HM Treasury and OFSI have published guidance on ransomware and financial sanctions at a time when ransomware has evolved into a serious cybercrime threat to the UK. The guidance makes it clear that the UK government does not condone making ransomware payments and promotes the strengthening of cyber resilience measures (in particular, those advised by the National Cyber Security Centre, which are flagged in the guidance) to prevent and mitigate the effects of ransomware attacks. The guidance further outlines the relationship between ransomware payments and financial sanctions, and how individuals and entities can mitigate the risks of a financial sanctions breach.
Sanctions Litigation Update: Two Designation Challenges Dismissed; New Criminal Sanctions Evasion Case; Supreme Court to hear appeal in ownership and control case
In two separate cases the High Court and Court of Appeal have dismissed challenges by individuals seeking to be removed from the UK’s sanctions list. These cases demonstrate the robust approach the courts are taking to sanctions designations and the high bar required to successfully challenge them.
The CPS has charged Dmitry Ovsyannikov (former Russian deputy trade minister) with seven counts of breaching UK sanctions and two counts of money laundering. Ovsyannikov was designated under the Russia sanctions regime in 2020 for undermining Ukraine’s territorial integrity. The CPS allege that he has violated sanctions by opening a bank account and depositing funds into the account. The case is significant as it is the first-time prosecutors have charged a suspect with criminal sanctions evasion since the introduction of the UK’s autonomous post-Brexit sanctions regime in 2018. The last criminal sanctions evasion case was in 2011.
As noted in the Horizon Scanning section below, permission has been granted for the Supreme Court to hear arguments in the case between Boris Mints and PJCS National Bank.
Environment Agency launches Economic Crime Unit
The UK Environmental Agency has announced the launch of a new Economic Crime Unit, which will tackle serious financial offences in the waste sector. The unit builds on the work of the Financial Investigations Team in targeting money laundering and carrying out financial investigations in the waste sector. The unit will be comprised of two teams: the Asset Denial Team and the Money Laundering Investigations Team. The Asset Denial Team will focus on account freezing orders, cash seizures, pre-charge restraints and confiscations. The Money Laundering Investigations Team will enable the Environment Agency to conduct dedicated money laundering investigations targeting environmental offences.
Horizon Scanning
- Volkswagen have announced that they will seek permission to appeal the recent Court of Appeal decision, which required overseas companies to comply with information requests from the CMA. For more on the Court of Appeal’s decision see our January edition of the Bulletin.
- The Supreme Court is also set to hear arguments in the ongoing litigation between Boris Mints and PJSC National Bank and others. The latest decision was the Court of Appeal judgment in October 2023, finding that a sanctioned person can pursue a civil claim thorough UK courts. The outcome of the Supreme Court’s decision may help define the test for ownership and control under the UK’s sanctions regime.
