HSBC Holdings plc apologised and said it deeply regretted past conduct and compliance failures at its Swiss private bank as it reported a 17 per cent drop in annual profit yesterday.
Europe’s biggest bank said recent disclosures about past practices and behaviour at its Swiss private bank – where it has been accused of helping clients dodge taxes – reminded it of “how much there still is to do” at the bank.
“We deeply regret and apologise for the conduct and compliance failures highlighted which were in contravention of our own policies as well as expectations of us,” the bank said.
HSBC said it was cutting its target for return on equity to “more than 10 per cent”. The previous target was to exceed 12 per cent, and RoE fell to 7.3 per ent in 2014 from 9.2 per cent in 2013.
It reported a pretax profit of $18.7 billion for 2014, down from $22.6 billion the year before and below the average analyst forecast of $21 billion, after costs rose more than expected and its investment bank had a grim fourth quarter.
Underlying operating ex–penses were $37.9 billion in 2014, up 6.1 per cent from the year before, showing the struggle CEO Stuart Gulliver is having to lower costs in the face of tougher regulation and the need for more compliance staff. That continues to depress returns.
HSBC’s annual report also showed Gulliver was paid £7.6 million for 2014, down from £8 million in 2013 but still likely to be one of the highest pay packets for a European bank executive.
It also admitted that Gulliver holds a bank account in Switzerland that was set up in 1998 to hold bonus payments, responding to a report in The Guardian newspaper that said he had a Swiss account that contained £5 million in 2007.
A spokeswoman for the bank gave details of the account and of other issues related to Gulliver’s tax status, following the Guardian story.
The spokeswoman said Gulliver set up the account when he was living and working in Hong Kong to hold bonus payments. Full tax was paid in Hong Kong on the bonus payments and Gulliver has voluntarily declared his Swiss account to UK tax authorities for a number of years, the spokeswoman said.
She said the account was set up in 1998 in the name of a Panamanian company for reasons of confidentiality “and this had no other purpose and provided no tax or other advantage”. She did not say how much the account contained.
There was no suggestion in the Guardian report that Gulliver broke any rules.
The Guardian report, citing leaked files, said Gulliver was listed as the beneficial owner of an account in HSBC’s Swiss bank in the name of Worcester Equities Inc, an anonymous company registered in Panama. It was through this entity that Gulliver’s HSBC bonuses were paid until 2003, and he also held a second account in the name of Worcester Foundation, which had been closed before 2007, the Guardian said.
The Guardian also reported Gulliver had remained domiciled in Hong Kong for legal and tax purposes.
The HSBC spokeswoman said Gulliver was a non-domiciled UK tax resident.
He moved to Hong Kong in 1980 and became a permanent resident with right of abode, along with his wife who is an Australian national, the spokeswoman said.
“Hong Kong is Gulliver’s home and as a matter of law he is domiciled in Hong Kong. It should not be a surprise that Gulliver, who has spent the majority of his nearly 35-year career at HSBC in Hong Kong, has made his home there,” the spokesperson said.
“Since being posted to the UK from Hong Kong in 2003, Gulliver has paid full UK tax on the entirety of his worldwide earnings, less a credit for tax paid additionally in Hong Kong (where he is also tax resident) on that part of the same earnings doubly taxed,” the spokeswoman said.
Non-domicile status and the remittance basis rules do not affect the UK taxation of his worldwide earnings from HSBC, the spokesperson added.
Extra fines, compensation costs
HSBC Holdings plc had to set aside £358 million more to cover potential fines for alleged manipulation of foreign exchange markets and warned it could face a $500 million bill to compensate US customers sold debt protection products.
HSBC said in its annual report yesterday that it had paid restitution to some US customers in connection to debt protection and other products offered before May 2012.
It said additional remediation for this issue “may lie in a range from zero to an amount up to $500 million”.
HSBC paid $611 million to US and UK authorities in November when it was one of six banks fined for alleged manipulation of FX markets.
US, UK and other authorities are still investigating the issue and the bank had $550 million provisioned at the end of December, its annual report said.