HSBC warned yesterday that regulatory zeal to punish wrongdoing was frightening its staff from taking reasonable business risk on lending, as the group unveiled a slide in profits.
Douglas Flint, the banking giant’s Scots-born chairman, said the tougher regulatory climate, following a spate of mis-selling and rate-fixing scandals, was creating “disproportionate risk aversion” among its bankers.
He said: “There’s a creeping concern that staff are clearly very focused on the penalties for getting things wrong and are building risk-aversion into the way they think. We’ve got to avoid getting to the state where there’s a zero risk tolerance.”
Flint added that he feared that such behaviour in decision-making could result in households and businesses being excluded from the financial system, and called for more clarity from public policy bodies and regulators on their expectations.
Recent major fines for misconduct have included $9 billion (£5.3bn) on BNP Paribas of France. HSBC was fined a record $1.9bn in 2012 for breaching US sanctions on money laundering in Mexico, and has since pulled out of some business areas and countries, including Panama, to reduce the risk of future problems.
HSBC told investors that it was spending $800 million a year more on regulatory compliance globally than it was in 2011. The bank and its rivals still face possible future fines and legal costs from continuing regulatory inquiries, including a worldwide investigation into the alleged rigging of foreign exchange markets. HSBC chief executive Stuart Gulliver said it would also cost the bank hundreds of millions of pounds a year to meet the UK regulatory requirement to ring-fence its high street operation from its riskier investment banking division by 2019.
His comments came as the group posted a 12 per cent fall in pre-tax profits to $12.3bn for the first six months of the year, down from $14bn last time.
Revenues dropped 9 per cent to $31.2bn, partly due to closing businesses now regarded as peripheral and a slowdown in investment banking.
Gulliver said he expected UK interest rates to rise from historic lows of 0.5 per cent towards the end of this year, but that any improvement would take six months to be felt.
HSBC, founded by Scots banker Thomas Sutherland in 1865, has calculated that a 0.25 per cent rise across a range of rates would lift its annual income by almost $1bn a year.
However, the chief executive said political uncertainty in various parts of the globe, “including the UK with the Scottish referendum coming up”, meant now was not the time for the group to be bolder in its lending.
Gulliver has cut 40,000 jobs and disposed of more than 60 businesses over the past three years to cut costs, but largely maintained the broad business mix of Britain’s biggest “universal bank”.
The bank’s shares ended the day up just 5.7p at 635p. Mike Trippitt, an analyst with Numis Securities, said: “I think resilience is the word”.
He added: “Gulliver is signalling he thinks rates will move this year, US rates first half of next year. Well, that’s got to be good for [profit] margins – that’s the one thing that will get this stock moving.”