HSBC has been hit by a record £10.5 million fine by the Financial Services Authority (FSA) because of inappropriate investment advice to the elderly.
NHFA, one of the banking giant's subsidiaries, advised 2,485 elderly customers to invest in asset-backed investment products such as investment bonds, to fund long-term care costs between 2005 and 2010.
These customers were entering, or already in, long-term care, and were reliant on these investments to fund their care.
These type of asset-backed investments are recommended for a minimum period of five years, but in some cases the individual customer's life expectancy fell short of this period and they were forced to make withdrawals from these investments early. Coupled with product charges, the withdrawals led to a 'fast reduction of capital'.
As a result, the group has been hit with a £10.5 million fine, the largest-ever retail fine handed out by the City watchdog. In addition to the fine, nearly £30 million will be paid in compensation to NHFA customers, HSBC estimates.
The FSA found that unsuitable advice had been given to 87% of customers involved with these investments, and ruled that NHFA had failed to recommend suitable products for elderly customers.
NHFA's vulnerable customer base, the 'significant' number of affected customers, the length of time over which failed advice was given and the fact that NHFA was the leading supplier of advice on long-term care products are cited by the watchdog as reasons for the record fine.
The total amount invested in these products over the period was £285 million, meaning the average amount invested per customer was approximately £115,000.
Brian Robertson, chief executive of HSBC Bank, says he "fully accepts" NHFA's advice failings.
"We are undertaking a full review of the advice given to impacted customers and I can guarantee that every customer who is found to have not been treated fairly will not be disadvantaged," he says.
"At this stage NHFA customers do not need to contact us. We will be contacting them directly during the coming weeks with the aim of putting things right as quickly as possible."
Tracey McDermott, acting director of enforcement and financial crime at the FSA, says NHFA was "trusted by its vulnerable and elderly customers".
"It breached that trust to sell them unsuitable products. This type of behaviour undermines confidence in the financial services sector."
She adds: "This penalty should serve as a warning to firms that they must have the right systems and controls in place to manage and identify risks when they acquire new businesses. A failure to do so can lead not only to detriment to their customers but to significant reputational and regulatory cost."
This article was written for our sister website Money Observer