London-based HSBC Holdings disclosed in an earnings report this week that it has set aside more than $1.6 billion to cover legal and compliance costs in connection with several ongoing regulatory investigations and improvements to its compliance operations.
In its latest interim management report, issued Nov. 3, HSBC said it has set aside $378 million for a proposed resolution with the U.K. Financial Conduct Authority to resolve claims that the bank manipulated the foreign exchange (Forex) market. Specifically, HSBC disclosed that the matter pertains to its “systems and controls relating to one part of its spot FX trading business in London.”
Any resolution reached is “likely to involve the payment of a significant financial penalty,” HSBC stated. “We continue to cooperate fully with regulatory and law enforcement authorities in the U.K. and other jurisdictions.”
During an earnings call, HSBC Group Chief Executive Officer Stuart Gulliver said, “there are likely to be other regulatory bodies or judicial bodies that may well also be seeking penalties for the same thing.”
The Forex market investigation involves multiple banks in various countries. JP Morgan, Barclays, Citigroup, UBS, and RBS are all expected to reach a settlement with British regulators this month.
The $378 million for the proposed FCA settlement comes on top of the $550 million settlement the bank reached with the Federal Housing Finance Authority in September to resolve allegations that it misrepresented the quality of mortgage-backed securities sold to Fannie Mae and Freddie Mac leading up to the financial crisis, and another $701 million to for allegedly mis-selling payment protection insurance policies to U.K. customers.
Additionally, the bank said that it has been summoned to appear before French magistrates related to a possible criminal investigation into whether its Swiss private bank helped French citizens evade taxes. “Although the outcome of the hearing, and any such investigation, is at this time uncertain, as matters progress it is possible that any fines, penalties or other terms imposed could be significant,” HSBC stated.
In its interim management report, HSBC said it spent $1.3 billion in operating expenses, reflecting in part increases in risk and compliance expenses. “The operating costs to run a global bank of our size and scale today are higher than they were a year or two ago,” Gulliver said.
During the earnings call, Gulliver added that nearly one in 10 of the bank’s 257,900 employees—or 24,800 employees—are in risk and compliance roles. When you consider the increase in headcount in the compliance space over the last two years, he said, “we’re not through the regulatory change agenda quite yet.”
Furthermore, the bank stated in its interim management report that its “Global Standards program” has transitioned from design to implementation. “Our global businesses are currently embedding operating procedures to deliver the global anti-money laundering and sanctions policies which were approved and issued earlier in the year,” HSBC stated. “Investment has also been made in developing our financial crime compliance expertise and building strategic infrastructure solutions for customer due diligence, transaction monitoring and sanctions screening.”
Gulliver concluded that the cost of fines and penalties, customer redress, and escalating legal and compliance risks will continue to ramp up HSBC’s operation costs for the foreseeable future. “The cost of global standards, the cost of compliance and regulation, are going to be higher for a period of time,” he said. “We can see ahead a continuous need to tighten up standards. We can also see ahead almost an inevitable wrath of further conduct and charges.”