One of the UK's best-known investors has sold all his stock in HSBC, warning that "fine inflation" means the bank is too risky an investment.
Neil Woodford, widely regarded as one of the UK's most successful fund managers, revealed he sold all his fund's HSBC stock last month because he was concerned about the increasing size of fines for past misconduct.
His decision is a blow to HSBC – the UK's largest bank – which faces a string of multimillion-pound fines from ongoing investigations in at least a dozen jurisdictions, spanning the rigging of benchmark interest rates to the manipulation of gold and silver prices.
HSBC warned last month that it faced "significant" fines, as it announced a 12% fall in first-half profits to $12.3bn (£7.4bn).
Woodford, who launched his own fund in June after 25 years at Invesco Perpetual, said he was concerned that fines are increasingly based on a bank's ability to pay rather than on the transgression. In a post on his blog, he wrote: "I am worried that the ongoing investigation into the historic manipulation of Libor and foreign exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine."
Woodford sold £64m of HSBC stock in August, which was equivalent to 2.68% of his fund's assets. Although he was not suggesting that HSBC is a bad investment, he said other stocks that are undervalued by markets would better serve his clients.
HSBC has seen its reputation battered in recent years. In 2012 it was hit by a $1.9bn fine (then £1.2bn) for flouting US sanctions and failing to stop Mexican drug lords in their money-laundering operations.
In August the bank revealed it was setting aside $367m (£218m) to cover compensation for mistakes in loan statements to UK customers.
HSBC paid out nearly £5bn in fines between 2009-2013, according to data compiled by the London School of Economics and Political Science. But it is far from the biggest wrongdoer: the Bank of America has paid out £39bn over the five-year period, followed by JP Morgan, whose fines came close to £27bn. Among UK banks, Lloyds heads the rollcall of wrongdoers, with fines totalling £9bn, followed by HSBC and Barclays. The top 10 banks have paid out close to £100bn in fines since the depths of the financial crisis, to the end of last year.
Roger McCormick, managing director of the CCP Research Foundation, who led the LSE research team, said: "I am pretty sure that if you asked a bank four years ago if they could expect fines at the level of $10bn or $20bn they would have been very surprised.
"We are still only two thirds of the way through the year and 2014 is producing some remarkable statistics already and when we put the numbers together they are going to be quite significant."
In July BNP Paribas, France's biggest bank, was fined nearly $9bn (£5.4bn) by US regulators for helping some customers evade US sanctions, despite an intervention from President François Hollande, who lobbied the White House against "unfair and disproportionate" penalties.
McCormick said investors needed to judge each bank on a case-by-case basis: "It is desirable that banks should no longer be able to shrug off regulatory action as just a cost of doing business and something they can afford. In order to overcome that unacceptable attitude it may be important that fines are increased.
"I think some banks are learning the lesson that society has become very tired of this ethics-free, morality-free zone that certainly appeared to be in operation in banks until recent times."
McCormick is calling for banks to publish quarterly data on regulatory fines, making it easier for investors and the public to compare banks' compliance with the law. "If you want to restore public trust you have got to make this information available for everyone," he said. "It is high time banks were required to publish data of this kind on a regular basis, so the public at large and not just investors can see what is going on and require banks to give satisfactory explanation about what has happened in the past and what will happen to prevent [misconduct] from being repeated in the future."
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