HSBC subsidiary settles with BCSC for $1 million over forced mutual fund redemptions

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A subsidiary of global bank HSBC has agreed to pay more than $1 million to settle allegations it forced clients to redeem company-branded mutual fund units when it stopped doing business with dozens of independent dealers, potentially harming the clients through losses and tax consequences.

According to the settlement agreement reached Wednesday betweenHSBC Global Asset Management (Canada) Ltd. and the British Columbia Securities Commission, the market value of the required redemptions was about $21.9 million and more than 1,000 client accounts were affected.

“GAM Canada admitted that requiring people to redeem their units early was unfair, because investors were initially told that the funds were suitable for long-term investment time horizons,” the B.C. regulator said in a statement.

“In addition to the investment losses and tax consequences, the redemptions may have also led to lost investment opportunities, and potential re-acquisition costs to replace investments.”

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The settlement agreement signed by HSBC Global Asset Management Canada chief executive Marc Cevey and BCSC executive director Peter J. Brady said the financial services firm has already earmarked about $625,000 that is to be paid to approximately 750 client accounts before Dec. 31.

The settlement agreement noted some investors may have incurred investment losses when the redemptions crystallized unrealized losses that might have been avoided if the units were held longer term. In addition, unanticipated tax consequences from capital gains triggered by the redemptions could have accrued for those with non-registered accounts.

Clients may also have suffered lost investment opportunities if the money sat in their accounts before they were made aware of the redemptions. In addition, clients may have incurred costs to purchase suitable replacement securities as a result of the redemptions.

HSBC Global Asset Management Canada, a subsidiary of HSBC Bank Canada that is registered as a portfolio manager, investment fund manager and exempt market dealer, will pay up to $700,000 to investors who suffered financial harm as part of the settlement. Any part of that amount that is not paid to clients will be paid to the BCSC on top of a $350,000 payment to the regulator that is part of the negotiated settlement.

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The settlement agreement noted that HSBC Global Asset Management did not profit from or receive an economic advantage from the required redemptions and the firm co-operated with the regulatory investigation.

In the settlement, HSBC said it cut ties with 51 independent dealers that “no longer aligned with its overall strategic focus” in 2014, following the implementation of global standards for consistent governance and oversight of financial crime compliance.

The financial services firm said it relied on those dealers to inform investors and to redeem their units. HSBC redeemed the units in cases where this was not done by the time the dealer agreements were terminated. The redemptions took place between 2014 and 2016 and proceeds from the redemptions were deposited into investor accounts, according to the settlement agreement.

In an emailed statement HSBC Canada spokesperson Caroline Creighton said the settlement would compensate the clients of third-party dealers of HSBC mutual funds, and added that the process for doing so is already under way.

She noted that the financial services firm took action under the terms and conditions of its dealer agreements “in good faith” to advance the global standards, and that the settlement acknowledged HSBC had not profited in any way from the situation.

“We are pleased to have this matter settled and have already begun the process of compensating the impacted unitholders,” she said.