HSBC has been reprimanded for failures that forced hundreds of small businesses in Scotland to keep or open an account with the bank in order to obtain a loan, breaking its commitments to end the practice.
The Competition and Markets Authority (CMA) is tightening up on previous legally-binding directions that require the banking giant to, among other things, ensure all staff are aware of the prohibition on what is known as “bundling”.
In new directions published yesterday the regulator has ordered HSBC to appoint an independent body to conduct annual compliance audits. The CMA is also mandating the implementation of enhanced controls and staff training measures.
The breaches took place between 2002 and 2021 with a total of 221 loans affected, all but eight of which were issued in Scotland. HSBC informed the CMA of the breaches between July 2020 and May 2021, and followed this up by repaying more than £800,000 in fees and charges collected on the errant accounts.
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In its fresh set of directions – which replace previous CMA instructions issued to HSBC in 2014 – the regulator noted the bank’s cooperation in reporting and rectifying the errors. However, given HSBC’s failure to “identify the breach for a significant number of years”, the CMA said it was necessary to guarantee “all appropriate measures to ensure on-going compliance”.
“The rules are clear – banks should not ask customers to open or retain business accounts in order to have a loan with them,” CMA senior director Adam Land said.
“It is right that HSBC has offered refunds and we will monitor compliance with our directives closely to ensure this doesn’t happen again.”
In 2002, following a Competition Commission investigation into banking services for small and medium-sized enterprises (SMEs), nine banks including HSBC agreed to end bundling in all but a narrow set of circumstances. These undertakings were designed to "preserve choice for small businesses with regard to which banking services they use".
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Banks signing the bundling undertakings have since 2014 been required to supply staff with annual written reminders on their obligations. The banks must also review their compliance via their internal audit functions, and report back annually to the CMA.
Based on this, the CMA concluded at that time that HSBC had failed to meet its obligations. The regulator issued its first set of directions on bundling to HSBC in October 2014, calling for a series of steps to ensure compliance.
In its annual compliance report of July 2020 HSBC told the CMA there was “a potential issue with a small number” of loans that included a clause giving HSBC the right to terminate the loan if HSBC ceased to the borrower’s principal commercial bank. The issue was first identified in January 2020, though no breach was identified at that time.
Up to 2017, the clause was said to have been mistakenly included in some Scottish loan paperwork because staff misunderstood the application of Scots law to the narrow conditions under which bundling is allowed.
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From late 2017 onwards, HSBC loan agreements were prepared using a document management system. In these instances, the loan termination clause was said to have been incorrectly included because of an error in the coding of certain loan agreement templates.
HSBC said yesterday that it has again taken a “number of measures” to update its processes and procedures.
“We are sorry that an error in our legal documentation for 200 predominantly Scotland-based customers resulted in us potentially hindering them from switching banks,” a spokesperson said. “We have apologised to the customers concerned and have proactively refunded all fees and charges that they incurred during the period that those terms and conditions were applicable.
“We have been working closely with the CMA and have made changes to our processes and procedures to ensure that we are fully compliant with the undertakings.”
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