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SEBI Gets Tough on HSBC after MoneyLife’s Expose

Moneylife’s action to expose HSBC for mismanaging the funds of singer Suchitra Krishnamoorthi has paid off; SEBI has now asked HSBC to explain its behaviour or face the prospect of losing its mutual fund distributor licence. In a notice on Nov 1, SEBI has a strongly worded assessment of HSBC’s action and a demand to get the facts out.

After an extensive investigation of her complaint, SEBI found out that:

  • There was excessive churning in the portfolio of the complainant as per details of all the mutual fund transaction carried out for the complainant by HSBC. The complainant’s money had been invested in 38 different schemes of mutual funds.
  • A large number of the investments made in Mutual Fund Schemes have been redeemed in short span of time and redemption proceeds have been used to again invest in other Mutual Fund Schemes, some of which appear to be similar to the schemes redeemed.
  • The Mutual Fund Portfolio of the Complaint was churned multiple times and it is alleged that the only plausible reason for this churning of portfolio could be to earn more commissions.
  • The total commissions/charges earned by HSBC against transactions in the name of the complaint was Rs27.93 lakh
  • It is seen from capital gains statement for the account of the complaint as submitted by HSBC that a large number of investments were for relatively shorter periods which are difficult to comprehended considering the risk profile of the complainant.
  • The investments have been made in balanced funds, which was not in line with the risk profile of the complainant.
  • Therefore, it is alleged that you have not acted in the interest of the complainants and the investments made by you on behalf of the complainant’s portfolio.
  • Further, this practise exercised by you is deceitful so as to induce excessive churning in the complainant’s portfolio and the same can be categorised as fraudulent and unfair practice on the complainant who had entrusted HSBC with her money.

Now this is how a regulator should behave!

SEBI is the right regulator to approach, as this is a case of HSBC acting as a mutual fund agent or an investment adviser, not as a bank. The regulation is not RBI’s and RBI shouldn’t attempt to defend HSBC.

But SEBI is a very slow actor. Last year, it dinged HSBC for financing promoters of the Adani group in manipulating Adani shares. In fact, even after HSBC wanted a “consent” order paying just Rs. 1-2 crores, SEBI decided that was too little (wanted 50 cr. instead). SEBI decided to take HSBC to court. But it’s not clear what happened there – I don’t see any news after June 2012.

Let’s hope this case does not just wither away and die. HSBC must be fined. They are one of the largest mutual fund distributors around, and if they are barred from mutual fund commissions for two years, it will be a fitting message to send about misselling especially by banks who seem to have the sickest, dirtiest people who don’t think twice about stealing a widow’s retirement money. I would like to see them go to jail and suffer, and for the bank management to suffer losses when such cases happen.

  • Manish says:

    So who was the relationship manager? Need to stay away from that person.

  • FB says:

    Completely agree with you. Much tougher punishments are required to deter such behavior. I think it is an institutional problem, not just a problem with one RM or the other.
    Also, SEBI should utilize a higher portion of its funds to educate investors about the Direct plans.

  • amar says:

    It was Mumbai Mirror who did front page story on her, not Money Life, which might have followed up on the story.

  • Sanjeev B says:

    Finance selling has become a bottom-of-the-heap profession. Banks need to be punished for this. The ‘relationship manager’ is not the only one who is responsible, it is all the managers up the line. People who frame policies and incentives that induce cheating, and then ignore cases till they are forced to act due to public and legal pressure.

  • rajivahuja says:

    On hindsight I think Ms Suchitra should have engaged a good financial planner instead of Investment Bank ,not that HSBC is an investment bank. In my experience it is better to do your own homework,instead of handing over your money to wealth managers. In fact I feel if there is any doubt,I talk to you. Your blog I feel is better than any RM.

  • Asmita says:

    I Agree with Rajiv a good financial planner is must.
    HSBC’s name comes up in various frauds, black money cases..Its credit card is among worst plus its MF schemes are running on high expense ratio with low AUMs still don’t know why people trust it with hard earned money.
    Personal banking with so called dedicated RM is only to boost banks commissions only.

  • Ravi says:

    Rajivahuja – Who is a good financial planner? One comes to know after the fact. I am sure Ms. Suchitra believe HSBC were good financial planners. All are in for the money – fees and/or commissions. Given the skewed incentives (conflict of interest I must say), getting good and honest advice is tough.

    • FB says:

      First step in getting good and honest advice is to make sure that your incentives are aligned with that of your financial adviser. The problem is that most retail investors are either unaware or turn a blind eye to the clear conflict of interest i.e. the adviser earns from commissions and hence will recommend a fund which probably has higher commission and not one which might do well. What the investors don’t realize that they are indirectly bearing the cost in the form of higher expense ratios. The bottom line is – there is no “free” advice.

  • Praveen says:

    If you are referring to Suchitra till end, then Suchitra is divorcee & not a widow!

  • Infact this is why I shut my account with HSBC. My relationship manager sold me a ULIP as a tax saving investment, mind you as an investment and not as an insurance product. She neglected to tell me that the charges for the first year would be Rs. 40,000. Where was the tax saving in that!!
    I also noticed that all my relationship managers there would try to churn my portfolio often. Their standard excuse was this MF has not done as well as we anticipated, you should sell and shift to this one. Being an IT professional I was financially uneducated and fell for this. Now since the last three years I have been reading up a lot on investing and am (hopefully) a lot wiser.
    Infact HSBC while the service they provide is good, is not a good bank to be with. I have shut my account two years back with them so I don’t know if this has changed but their Netbanking sucks. I mean you cannot purchase items on lets say Flipkart, IRCTC etc using their Netbanking as you can do with HDFC, Axis, ICICI etc. You cannot even pay your taxes online with them. Also their charges are a lot higher.
    Having said this, I have seen a tendency of relationship managers from HDFC and Axis etc to also try churning the portfolio however not to such an extent as HSBC.
    The moral of the story is, every irrespective of their profession damn well educate themselves on investing and tax saving instruments. Advice on financial matters should be taken with a pinch of salt specially from bankers 🙂

    • rajivahuja says:

      Citibank is just like that. In fact the only bank where bank staff was not pushing financial products which were not good for the depositer’s financial health was SBI. I think RM’s take advantage of our financial illteracy.