HSBC 2015 Annual Report Download - page 191

HSBC HOLDINGS PLC
189
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Other material risks
A summary of our current policies and practices regarding
reputational risk, fiduciary risk, pension risk and sustainability risk
is provided in the Appendix to Risk on pages 224 to 226.
Reputational risk
Reputational risk is the risk of failure to meet
stakeholder expectations as a result of any event,
behaviour, action or inaction, either by HSBC itself,
our employees or those with whom we are associated,
that might cause stakeholders to form a negative view
of the Group. This may have financial or non-financial
effects, resulting in a loss of confidence, or have other
consequences.
Reputational risk relates to stakeholders’ perceptions,
whether based on fact or otherwise. Stakeholders’
expectations are constantly changing and thus reputational
risk is dynamic and varies between geographical regions,
groups and individuals. As a global bank, HSBC has an
unwavering commitment to operating to the high
standards we have set for ourselves in every jurisdiction.
Any lapse in standards of integrity, compliance, customer
service or operating efficiency represents a potential
reputational risk.
A number of measures to address the requirements of the
US DPA and otherwise to enhance our AML, sanctions and
other regulatory compliance frameworks have been taken
and/or are ongoing. These measures should also serve over
time to enhance our reputational risk management. For
further details on the implementation of the Global
Standards, see Strategic Report on page 21 and
‘Compliance risk’ on page 178.
We have a zero tolerance for knowingly engaging in
any business, activity or association where foreseeable
reputational risk or damage has not been considered and
mitigated. There must be no barriers to open discussion
and the escalation of issues that could affect the Group
negatively. While there is a level of risk in every aspect of
business activity, appropriate consideration of potential
harm to HSBC’s good name must be a part of all business
decisions.
In 2015, we restructured our Reputational Risk sub-
function to increase our focus on the management of
reputational risk. With an expanded mandate, the unit is
better positioned to provide bespoke advisory services to
the business on reputational risks to the Group and to work
with the Financial Crime and Regulatory Compliance teams
to mitigate such risks where possible.
Fiduciary risk
Fiduciary risk is the risk to the Group of breaching our
fiduciary duties when we act in a fiduciary capacity as
trustee or investment manager or as mandated by
law or regulation.
A fiduciary duty is one where HSBC holds, manages,
oversees or has responsibility for assets on behalf of a third
party that involves a legal and/or regulatory duty to act
with a high standard of care and with good faith. A
fiduciary must make decisions and act in the interests of
the third party and must place the wants and needs of the
client first, above the needs of the Group.
We may be held liable for damages or other penalties
caused by failure to act in accordance with these duties.
Fiduciary duties may also arise in other circumstances,
such as when we act as an agent for a principal, unless the
fiduciary duties are specifically excluded (e.g. under the
agency appointment contract).
Our principal fiduciary businesses (the ‘designated
businesses’) have developed fiduciary limits, key risk
indicators and key performance indicators to monitor their
related risks.
Pension risk
We operate a number of defined benefit and defined
contribution pension plans throughout the world. Most
of our pension risk arises from defined benefit plans.
The largest of these is the HSBC Bank (UK) Pension
Scheme (‘the principal plan’).
At 31 December 2015, the Group’s aggregate defined
benefit pension obligation was $38bn and the net asset
on the balance sheet was $3.1bn (2014: $42bn and $2.7bn,
respectively). The principal plan is the largest contributor
to pension risk in the Group: it contributed $28bn to the
Group’s defined benefit obligation and $5.0bn to the
Group’s net asset.
The principal plan
The principal plan has a defined benefit section and a
defined contribution section and is overseen by a
corporate trustee. This trustee has a fiduciary responsibility
to run the plan. Unless stated otherwise, this section
relates to the defined benefit section.
The investment strategy of the principal plan is to hold the
majority of assets in bonds, with the remainder in a diverse
range of investments. It also includes some interest rate
and inflation swaps to reduce the level of interest rate risk
and inflation risk (see Note 41 in the Financial Statements).
The target asset allocation of the principal plan at the year-
end is shown in the table below.
The principal plan – target asset allocation
2015 2014
% %
Equities54 19.4 19.4
Bonds 64.5 64.5
Alternative assets55 10.6 10.6
Property 5.5 5.5
Cash56
–
–
At 31 December 100.0 100.0
For footnotes, see page 191.
The latest actuarial valuation of the principal plan was made
as at 31 December 2011 by C G Singer, Fellow of the Institute
and Faculty of Actuaries, of Willis Towers Watson Limited. At
that date, the market value of the plan’s assets was £18bn
($28bn) (including assets relating to both the defined benefit
and defined contribution sections, and additional voluntary
contributions). This asset value was the same amount as the
actuary said was needed to meet all future expected benefit
payments, based on pensions earned to that date and