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FCA colluded to cover up alleged HSBC fraud

January 23, 2015 (corrected March 2, 2015. See note)

HSBC_2544376bWhen John Griffith-Jones and Martin Wheatley, chairman and chief executive of the Financial Conduct Authority, appear before the Treasury Select Committee at 9.30am next Tuesday, 27 January, the 13 MPs on the committee have an unprecedented opportunity to establish whether the FCA, just like its predecessor the FSA, is colluding with banks to cover up alleged fraud.

The MPs will almost certainly ask the regulator’s top bosses about obvious failures like the FSA’s “review” of the “misselling” of interest rate hedging products to SMEs by British banks, a review the regulator  outsourced to the guilty banks, thereby denying many small companies either a fair hearing or any real opportunity for proper compensation or justice (see my The Times article from September 2014)

I would also recommend that committee members – Tories Andrew Tyrie (chairman), Mark Garnier, Jesse Norman, Alok Sharma, Steve Baker and David Ruffey, Labour members John Mann, Andrew Love, Teresa Pearce, Rushanara Ali, Mike Kane; the Liberal Democrat John Thurso and the Scottish Nationalist Stewart Hosie – also ask Griffith-Jones, an ex KPMG accountant, and Wheatley, a former Hong Kong regulator, about an alleged fraud committed by the HSBC subsidiary HFC Bank, which the FCA has, in a somewhat cack handed manner, been seeking to misrepresent and whitewash.

The case suggests the FCA is no less of a captured regulator, willing to side with big banks (and take at face value their own guileful responses), than its disastrous predecessor, the FSA.

First, a bit of background…

HSBC, founded in Hong Kong in 1865 to facilitate the opium trade with mainland China, paid $14bn for scandal-plagued California-based subprime lender Household Finance Corporation in 2003. HFC operated in the UK under the name HFC Bank and, in view of its comically overpriced and ill timed Household acquisition, HSBC was looking to maximise short-term revenues from it in whichever ways it could. In other words, an already predatory lender was to become even more predatory.

1416849404263Once the HSBC / HFC deal was completed, UK department store chain John Lewis Partnership sold its store card business to HFC Bank (which already managed store cards for UK retailers Dixons, Currys, Furniture Village, PC World, B&Q, while peddling subprime loans to British consumers using the HFC Bank and Beneficial Finance brands). The employee-owned retailer, which also owns supermarket chain Waitrose, appears to have had little idea what it was letting itself in for.

Soon after that deal Nicholas Wilson, a whistleblower who formerly worked at Weightmans a law firm retained by HFC Bank to handle debt collection work on third party store card brands, noticed HFC Bank was adding what seemed to be illegal additional fees of 16.4% onto accounts that were  in arrears and had been referred to external law firms such as Weightmans and Restons. Purportedly to cover the cost of recovering debt, the fees were added willy-nilly and irrespective of whether any litigation or legal fees were required. In some cases, store card customers were being charged additional sums of £5,000 or more on top of debt and interest. In short Wilson discovered that a great many store card debtors who owed money to JLP and other retailers were being fleeced.

Wilson, being a man of principle, thought this was wrong and decided to blow the whistle. He sought to persuade regulatory bodies including the Solicitors Regulation Authority and the FSA to take action and to intervene on customers’ behalf. Initially he was stonewalled and it was to no avail.

Then, on 22 November 2010, the Office of Fair Trading took action, issuing an order against HFC Bank (HSBC) saying that, if the bank wished to continue hitting customers with the so-called “collection charges”, it would have to amend the terms & conditions on customers’ credit agreements. The Solicitors’ Regulation Authority (SRA) also upheld Wilson’s complaint that the charges amounted to unlawful contingency fees.

Wilson first informed the Financial Services Authority in December 2012. The City regulator took no action then, in response to a Freedom of Information request from Wilson, successor body the FCA sent him an email dated 10 April 2014, in which outlined the reasons for its inaction. Here is an excerpt:-

Prior to 2010, when HFC sent an account to solicitors to recover outstanding debts (e.g. on personal loans, credit and store cards), it added a charge to reflect the costs of the recovery. HFC’s agreements with customers gave it the right to do this and the fee was added after the customer had defaulted on the loan/credit card payments.

Whilst we did not forward your complaint to the OFT at that time, we are aware that, in November 2010, following a review by the OFT of industry debt collection practices, the OFT imposed requirements on a number of firms, including HFC. The requirements on HFC were imposed under section 33A of the Consumer Credit Act 1974 and required HFC to change various aspects of its collection practices. As a result, HFC removed all of these charges from its then existing book and has not added the charge to any new accounts.

Then came the smoking gun. Joel Benjamin, a New Zealand-born campaigner for financial justice with Move Your Money, wrote to HSBC asking the bank why it had failed to take action in response to Wilson’s allegations. In its reply to Benjamin, dated 30 June, HSBC said:-

Prior to 2010, when HFC sent an account to solicitors to recover outstanding debts (e.g. on personal loans, credit and store cards), it added a charge to reflect the costs of the recovery. HFC’s agreements with customers gave it the right to do this and the fee was added after the customer had defaulted on the loan/credit card payments.

In November 2010, following a review by the OFT of Industry debt collection practices, the OFT imposed Requirements on a number of firms, including HFC. The Requirements on HFC were imposed under s.33A of the Consumer Credit Act and required HFC to change various aspects of its collection practices. As a result, and to ensure that a consistent approach was taken on this practice across all HSBC brands in the UK, HFC removed all of these charges from its then existing book and has not added the charge to any new accounts.”

If you exclude the eighteen words at the start of the second paragraph, the FCA’s response was identical to that of the bank, suggesting it had simply asked the bank how it should respond and had then cut and pasted the bank’s response into it own.

But not only was the FCA’s response a ‘cut and paste’ job. Embarrassingly for both bank and regulator, the first paragraph of the response was incorrect insofar as it misrepresented what the OFT had actually ruled, which was that HSBC / HFC had no right to add the charges, unless it first changed its lending agreements with customers:

st1It seems that HFC / HSBC and the Financial Conduct Authority have been caught red handed, and Wilson accuses them of colluding to cover up a £1 billion fraud. He says that, if the bank was to be obliged to compensate the 500,000-600,000 people it has allegedly fleeced, it would need to pay them an average of £1,500 (with interest) each.

On 12 December 2014, FCA complaints handler Michelle Broadhurst responded on behalf of the regulator to a formal complaint sent by an associate of Wilson’s, Ben Tomeo (Tomeo’s letter highlighting the regulator’s ‘cut and paste’ job among other things was sent to the regulator on 7 August 2014). In her reply, Broadhurst ‘fessed up’, admitting that the regulator had copied HSBC’s exact words. She conceded that the regulator had exercised “poor judgement” in doing so, and on behalf of the regulator, she apologised. She wrote:-

Due to confidentiality restrictions, under s348 of the FSMA, I am restricted as to what I can say on this point. As consent was provided by the firm for the inclusion of the wording, I am able confirm that the wording was indeed provided by HSBC. However, I do not find that the inclusion of the wording is evidence of any collusion. My finding, having reviewed all the relevant records, is that the Authority exercised poor judgment in including the wording provided by HSBC in its response and this point is accepted. However, this is said with the advantage of hindsight and I do accept that it was only included in an attempt to try and be helpful with no malicious intent.

So, shamelessly, the FCA’s Broadhurst was denying it is wrong for a regulator to regurgitate the (factually inaccurate) words put together by a bank’s lawyers in the hope the bank can bat complaints of fraud into the long grass, and therefore avoid the need to compensate hundreds of thousands of customers that it has effectively robbed. Others including Wilson see this rather differently. I hope the 13 members of the Treasury select committee do too and that, at the very least, they raise this scandalous example of inadequate regulation with Griffith-Jones and Wheatley at Tuesday’s hearing.

HSBC and the FCA declined to comment.

Update: Saturday January 24th, 2015

Here some tweets about this story

Note: This blog was corrected on 2 March 2014. Michelle Broadhurst was not responding on behalf of the Complaints Commissioner but on behalf of the regulator. 

Short URL: http://www.ianfraser.org/?p=10853

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11 Comments for “FCA colluded to cover up alleged HSBC fraud”

  1. […] pasted portions of a letter written by HSBC’s own legal team. Financial journalist, Ian Fraser, exposed the incident, concluding […]

  2. […] pasted portions of a letter written by HSBC’s own legal team. Financial journalist, Ian Fraser, exposed the incident, concluding that: “HFC/HSBC and the Financial Conduct Authority have been caught red […]

  3. […] Top Track 250 for 7 years."' The FCA(Financial Conduct Authority) has been found to be compicit in covering up the fraud, painting a picture of absolute untouchability for 'too big to fail' banks in Britains financial […]

  4. […] pasted portions of a letter written by HSBC’s own legal team. Financial journalist, Ian Fraser, exposed the incident, concluding […]

  5. […] pasted portions of a letter written by HSBC’s own legal team. Financial journalist, Ian Fraser, exposed the incident, concluding […]

  6. […] journalist Ian Fraser exposed that the FCA is colluding with HSBC to cover up the fraud. A campaigner for financial justice, Joel […]

  7. […] journalist Ian Fraser exposed that the FCA is colluding with HSBC to cover up the fraud. A campaigner for financial justice, Joel […]

  8. […] journalist Ian Fraser exposed that the FCA is colluding with HSBC to cover up the fraud. A campaigner for financial justice, Joel […]

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