HSBC sets aside $1.8 bn for forex probe, misconduct

HSBC's profits fell short of expectations in the third quarter after the bank set aside $1.8 billion for misconduct settlements and compensation for customers, including a potential fine for rigging currency markets.

The provision and a jump in HSBC's everyday compliance costs show the impact of regulators' increasing efforts to clamp down on bad behaviour in the global banking industry that contributed to the financial crisis.

HSBC said on Monday it had spent $700 million more this year on compliance and risk than a year ago, and that level of expense looked set to stay, meaning it would miss one of its main cost targets.

"The cost base of a global bank like ourselves is higher than it was before, because ... it includes a significantly higher compliance and regulatory cost than historically the banks had invested in," CEO Stuart Gulliver said.

"It reflects the fact that standards, foreign policy, etc, all evolve in a world that is a lot less certain than it was 10, 15 years ago."

HSBC's third-quarter underlying earnings fell 12 per cent from a year ago to $4.4 billion, after operating expenses jumped 15 per cent on the year.

That included a $378 million provision for the forex investigation, $589 million to compensate British customers who were mis-sold payment protection insurance products and a $550 million settlement in the US for mis-selling mortgage-backed securities.

Gulliver said the bank was likely to miss a target set out 18 months ago to get costs down to about 55 per cent of revenues by 2016. He said it was more likely to be in the high 50s or near 60 per cent. It was 62.5 per cent so far this year.

HSBC added 1,400 more compliance staff in the third quarter and now had 24,800 staff in risk and compliance, or one in 10 of its employees.

The bank also said it had been summoned to appear before French magistrates over whether its Swiss private bank had helped French citizens to evade tax, and could face a criminal investigation.

"There is quite a bit of upward pressure on costs. It's an honest assessment of where they are, the regulatory cost of being a large global bank is far greater," Mike Trippitt, analyst at Numis Securities, said.

HSBC's shares were down 1.8 per cent at 628 pence by 1225 GMT, underperforming a 0.8 per cent dip in the European bank index.