HSBC 2012 Annual Report Download - page 232

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Operational risk > Compliance risk / Fiduciary risk
230
Distribution of operational risk losses in US dollars
by risk category
61%
10%
13%
12%
1%
3%
79%
4%
5%
9%
0%
3%
Compliance
Fraud
Legal
Operations
and Systems
People
Other
2011
2012
Compliance risk
(Unaudited)
Compliance risk is the risk that we fail to
observe the letter and spirit of all relevant
laws, codes, rules, regulations and standards
of good market practice, and incur fines and
penalties and suffer damage to our business
as a consequence.
All Group companies are required to observe the
letter and spirit of all relevant laws, codes, rules,
regulations and standards of good market practice.
In 2012, we experienced increasing levels of
compliance risk as regulators and other agencies
pursued investigations into historical activities and
as we continued to work with them in relation to
already identified issues. These included:
• an appearance before the US Senate Permanent
Subcommittee on Investigations and the DPAs
reached with US authorities in relation to
investigations regarding inadequate compliance
with anti-money laundering, the US Bank
Secrecy Act and sanctions laws, plus a related
undertaking with the FSA;
• investigations into the possible mis-selling of
interest rate derivative products to SMEs in the
UK; and
• investigations and reviews related to certain past
submissions made by panel banks and the
process for making submissions in connection
with the setting of Libor, Euribor and other
benchmark interest and foreign exchange rates.
As some HSBC entities are members of such
panels, HSBC Holdings and certain of its
subsidiaries have been the subject of regulatory
demands for information.
With a new senior leadership team and strategy
in place since 2011, we have already taken steps to
address these issues including making significant
changes to strengthen compliance, risk management
and culture. These steps, which will also enhance our
compliance risk management capabilities, including
the following:
• the creation of a new global structure, which
will make HSBC easier to manage and control;
• simplifying our business through the ongoing
implementation of our organisational
effectiveness programme and our five
economic filters strategy;
• introducing a sixth global risk filter which will
standardise the way we do business in high risk
countries;
• substantially increasing resources, doubling
global expenditure and significantly
strengthening Compliance as a control (rather
than as an advisory) function;
• continuing to roll out an HSBC Values
programme that defines the way everyone
in the Group should act; and
• adopting and enforcing the most effective
standards globally, including a globally
consistent approach to knowing and retaining
our customers.
Additionally, we have substantially revised
our governance framework in this area, appointing a
new Chief Legal Officer with particular expertise
and experience in US law and regulation, and
creating and appointing experienced individuals to
the new roles of Head of Group Financial Crime
Compliance and Global Head of Regulatory
Compliance.
It is clear from both our own and wider industry
experience that there is a significantly increased
level of activity from regulators and law
enforcement agencies in pursuing investigations in
relation to possible breaches of regulation and that
the direct and indirect costs of such breaches can
be significant. Coupled with a substantial increase
in the volume of new regulation, much of which
has some level of extra-territorial effect, and the
geographical spread of our businesses, we believe
that the level of inherent compliance risk that we
face will continue to remain high for the foreseeable
future.