Hang Seng Bank fined HK$66.4m for overcharging clients

Hong Kong’s securities watchdog has fined Hang Seng Bank (HSB) HK$66.4 million for overcharging its clients while selling investment products.

The Securities and Futures Commission (SFC) has reprimanded and fined the bank for serious regulatory failures about the bank’s sale of collective investment schemes (CIS) and derivative products and overcharging its clients and making inadequate disclosure of monetary benefits to them during various periods over nine years between February 2014 and May 2023.

The SFC’s disciplinary action stemmed from a referral by the Hong Kong Monetary Authority (HKMA) whose investigation revealed a range of concerns regarding HSB’s sale of CIS products during the period from 1 June 2016 to 30 November 2017.

Specifically, 111 client accounts executed 100 or more CIS transactions during the relevant period. While most transactions were labelled as the client’s “own choice", 46 clients were influenced by their relationship managers’ recommendations. These clients were encouraged to engage in excessively frequent trades with short holding periods, contradicting both the funds’ investment objectives and the clients’ preferred investment horizons. This frequent trading in CIS products led to significant transaction costs for the clients, greatly affecting their overall profit and loss, according to the release. 

The investigation revealed that HSB's internal controls were inadequate, failing to properly supervise and monitor the sale of CIS to clients. The bank did not maintain a sufficient audit trail to confirm that transactions were genuinely initiated by clients and lacked effective controls to monitor and follow up on potentially problematic transactions after they occurred.

Moreover, from 17 February 2014 to 19 December 2018, 388 clients who were not characterised by HSB as having knowledge of the nature and risks of derivatives purchased derivative funds in 629 transactions, and 148 of these transactions involved products whose risk level was higher than the clients’ risk tolerance level.

A joint investigation by the SFC and the HKMA has also found that, between November 2014 and May 2023, HSB improperly retained monetary benefits from client transactions, charged clients transaction fees beyond previously communicated amounts, and inadequately disclosed trailer fee arrangements for investment fund trading. In total, HSB received at least HK$22.4 million in excess benefits or fees from these transactions.

In light of the findings, the SFC considers that HSB failed to act with due skill and diligence in its clients' best interests, lacked the necessary resources and procedures for proper business conduct, did not make adequate disclosures, failed to avoid conflicts of interest, and did not comply with relevant regulatory requirements.

Christopher Wilson, the SFC’s executive director of enforcement, said: “HSB’s misconduct in these cases was serious and systemic. In particular, clients who declared making investment decisions themselves were in fact repeatedly solicited by HSB’s relationship managers to engage in frequent and excessive CIS transactions. As a result, the clients ended up incurring substantial transaction costs to their detriment. HSB also overcharged a significant number of clients across a multitude of the bank’s business lines over an extended period of time.”

Raymond Chan, executive director (enforcement and AML) of the HKMA, said: “This enforcement outcome is a result of close collaboration between the HKMA and the SFC. It helps to send a strong message to the industry that they should have in place adequate systems to ensure compliance with applicable regulatory standards.”

In a statement to MARKETING-INTERACTIVE, a Hang Seng Bank spokesperson said the issues are historical and have been fully addressed. The bank has also fully cooperated with the SFC and HKMA, accepting the regulators' decisions.

"With customers’ interests at the core of our business, we have continuously enhanced our procedures and internal controls, while providing support to our staff to uphold all professional standards.  We continue to remain focused on serving our customers," the spokesperson added. 

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