Annual Financial Report - 53 of 60

Further details of legal proceedings and regulatory matters are set out in Note 43. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC. In December 2012, HSBC made payments totalling US$1,921m to US authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws. Further details of the agreements reached with the US authorities are set out on page 558.

Customer remediation refers to activities carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.

Payment protection insurance

An increase in provisions of US$756m was recognised during 2013 in respect of the estimated liability for redress regarding the mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in 2011 amount to US$3,153m, of which US$1,138m was paid in 2013 (2012: US$957m). At 31 December 2013, the provision amounted to US$946m (2012: US$1,321m).

The estimated liability for redress is calculated on the basis of total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.

A total of approximately 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of US$4.1bn at 2013 average exchange rates. The gross written premiums on these polices was approximately US$5.0bn at 2013 average exchange rates. At 31 December 2013, the estimated total complaints expected to be received was 1.5m, representing 29% of total policies sold. It is estimated that contact will be made with regard to 1.9m policies, representing 35% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

The following table details the cumulative number of complaints received at 31 December 2013 and the number of claims expected in the future:

	Cumulative to 31 December                2013		Future         expected
Inbound complaints1 (000s of policies) ...................................................................................	1,022		240
Outbound contact (000s of policies) ........................................................................................	375		234
Response rate to outbound contact ..........................................................................................	49%		44%
Average uphold rate per claim2 ...............................................................................................	76%		72%
Average redress per claim (US$) ..............................................................................................	2,627		2,404

1  Excludes invalid claims where the complainant has not held a PPI policy.

2  Claims include inbound and responses to outbound contact.

The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer initiated complaint volumes received, and we handle responses to our ongoing outbound contact. A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately US$203m at 2013 average exchange rates. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately US$8m. In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer's case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress for this matter. The decay rate implies that by the end of 2015 inbound claim volumes would mean that the redress programme is complete. However, this timing is subject to some level of uncertainty as the decay rate may change over time based on actual experience.

Interest rate derivatives

A provision of US$776m (2012: US$598m) was recognised relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. Of this provision, US$453m related to the estimated redress payable to customers in respect of historical payments under derivative contracts, the remaining provision covered the expected write-off by the bank of open derivative contracts balances and estimated project costs. Following an FCA review of the sale of interest rate derivatives, HSBC agreed to pay redress to customers where mis-selling of these products occurred under the FCA's criteria. On 31 January 2013, the FCA announced the findings from their review of pilot cases completed by the banks. Following its review, the FCA clarified the eligibility criteria to ensure the programme is focused on those small businesses that were unlikely to understand the risks associated with those products. HSBC has also been working with the FCA and an independent 'skilled person' adviser to clarify the standards against which it should assess sales, and how redress should be calculated (for example, when it would be appropriate to assume a customer would have taken an alternative interest rate product). The extent to which HSBC is required to pay redress depends on the responses of contacted and other customers during the review period and the facts and circumstances of each individual case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress related to this programme. HSBC expects to make the main redress payments in respect of this programme in the near future.

Brazilian labour and fiscal claims

Within 'Legal proceedings and regulatory matters' above are labour and fiscal litigation provisions of US$500m (2012: US$506m) which include provisions in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case.

HSBC

	At 31 December
	2013		2012
	US$m		US$m
Subordinated liabilities
At amortised cost ..........................................................................................................................	28,976		29,479
- subordinated liabilities ................................................................................................................	24,573		25,119
- preferred securities ....................................................................................................................	4,403		4,360
Designated at fair value (Note 27) .................................................................................................	21,915		21,559
- subordinated liabilities ................................................................................................................	18,230		16,863
- preferred securities ....................................................................................................................	3,685		4,696
	50,891		51,038
Subordinated liabilities
HSBC Holdings ..............................................................................................................................	22,308		20,569
Other HSBC ..................................................................................................................................	28,583		30,469
	50,891		51,038

Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Where applicable, capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step-up or become floating rate based on interbank rates.

Interest rates on the floating rate capital securities are generally related to interbank offered rates. On the remaining capital securities, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the instruments contribute to regulatory capital. The IFRSs accounting and regulatory treatments differ due to the inclusion of issuance costs and regulatory amortisation.

HSBC's subordinated liabilities

Tier 1 capital securities

Tier 1 capital securities are perpetual subordinated securities on which investors are entitled, subject to certain conditions, to receive distributions which are non-cumulative. Such securities do not generally carry voting rights but rank above ordinary shares for coupon payments and in the event of a winding-up.

Qualifying tier 1 capital securities in issue accounted for as liabilities

				At 31 December
		First call date		2013 US$m		2012 US$m
Tier 1 capital securities guaranteed by HSBC Holdings1
US$1,250m	4.61% non-cumulative step-up perpetual preferred securities2 ...............	Jun 2013		-		1,250
€1,400m	5.3687% non-cumulative step-up perpetual preferred securities3 ...........	Mar 2014		2,022		1,933
£500m	8.208% non-cumulative step-up perpetual preferred securities ..............	Jun 2015		825		806
€750m	5.13% non-cumulative step-up perpetual preferred securities ................	Mar 2016		1,129		1,033
US$900m	10.176% non-cumulative step-up perpetual preferred securities, series 2 ..............................................................................................................	Jun 2030		891		891
				4,867		5,913
Tier 1 capital securities guaranteed by HSBC Bank plc1
£300m	5.862% non-cumulative step-up perpetual preferred securities ..............	Apr 2020		534		480
£700m	5.844% non-cumulative step-up perpetual preferred securities ..............	Nov 2031		1,157		1,131
				1,691		1,611

1  See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank plc'.

2  In June 2013, HSBC called its US$1,250m 4.61% non-cumulative step-up preferred securities at par.

3  In January 2014, HSBC gave notice that it will call and redeem the €1,400m 5.3687% non-cumulative step-up perpetual preferred securities at par in March 2014.

Guaranteed by HSBC Holdings or HSBC Bank plc

The six capital securities guaranteed on a subordinated basis by HSBC Holdings or HSBC Bank are non-cumulative step-up perpetual preferred securities issued by Jersey limited partnerships. The proceeds of the issues were on-lent to the respective guarantors by the limited partnerships in the form of subordinated notes. These preferred securities qualify as tier 1 capital for HSBC Group and the two capital securities guaranteed by HSBC Bank also qualify as tier 1 capital for HSBC Bank (on a solo and a consolidated basis).

These preferred securities, together with the guarantee, are intended to provide investors with economic rights equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer.

There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements or if HSBC Holdings or HSBC Bank have insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or effect repurchases or redemptions of their ordinary shares, until the distribution on the preferred securities has been paid in full.

With respect to preferred securities guaranteed by HSBC Holdings - if (i) HSBC's total capital ratio falls below the regulatory minimum ratio required, or (ii) the Directors expect, in view of the deteriorating financial condition of HSBC Holdings, that (i) will occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Holdings which have economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

With respect to preferred securities guaranteed by HSBC Bank - if (i) any of the two issues of preferred securities are outstanding in April 2049 or November 2048, respectively, or (ii) the total capital ratio of HSBC Bank on a solo and consolidated basis falls below the regulatory minimum ratio required, or (iii) in view of the deteriorating financial condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

Upper tier 2 capital securities

Upper tier 2 capital securities are perpetual subordinated securities on which there is an obligation to pay coupons. Such securities rank below lower tier 2 securities for coupon payments and in the event of a winding-up.

Qualifying upper tier 2 securities in issue

				At 31 December
		First call date		2013 US$m		2012 US$m
HSBC Bank plc
US$750m	Undated floating rate primary capital notes ..........................................	Jun 1990		751		750
US$500m	Undated floating rate primary capital notes ..........................................	Sep 1990		499		499
US$300m	Undated floating rate primary capital notes, series 3 .............................	Jun 1992		299		301
				1,549		1,550
The Hongkong and Shanghai Banking Corporation Ltd
US$400m	Primary capital undated floating rate notes ...........................................	Aug 1990		404		405
US$400m	Primary capital undated floating rate notes (second series) ....................	Dec 1990		402		402
US$400m	Primary capital undated floating rate notes (third series) .......................	Jul 1991		400		400
				1,206		1,207
Other HSBC subsidiaries
	Other perpetual subordinated loan capital less than US$100m ...............			22		21

 

Lower tier 2 capital securities

Lower tier 2 capital securities are dated securities on which there is an obligation to pay coupons. In accordance with the PRA's GENPRU, the capital contribution of lower tier 2 securities is amortised for regulatory purposes on a straight-line basis in their final five years before maturity.

Qualifying lower tier 2 securities in issue

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
HSBC Bank plc
£500m	4.75% callable subordinated notes1 ..................................	Sep 2015		Sep 2020		866		844
£350m	5.00% callable subordinated notes2 ..................................	Mar 2018		Mar 2023		635		630
£300m	6.50% subordinated notes ................................................	-		Jul 2023		494		483
£350m	5.375% callable subordinated step-up notes3 ....................	Nov 2025		Nov 2030		602		630
£500m	5.375% subordinated notes ..............................................	-		Aug 2033		884		925
£225m	6.25% subordinated notes ................................................	-		Jan 2041		370		362
£600m	4.75% subordinated notes ................................................	-		Mar 2046		980		958
€500m	Callable subordinated floating rate notes4 .........................	Sep 2015		Sep 2020		655		606
US$300m	7.65% subordinated notes ................................................	-		May 2025		380		394
						5,866		5,832
HSBC Bank Australia Limited
AUD200m	Callable subordinated floating rate notes ..........................	Nov 2015		Nov 2020		179		207
AUD42m	Callable subordinated floating rate notes5 .........................	Mar 2013		Mar 2018		-		44
						179		251
HSBC Bank Malaysia Berhad
MYR500m	4.35% subordinated bonds ................................................	Jun 2017		Jun 2022		152		164
MYR500m	5.05% subordinated bonds ................................................	Nov 2022		Nov 2027		154		168
						306		332
HSBC USA Inc.
US$200m	7.808% capital securities .................................................	Dec 2006		Dec 2026		200		200
US$200m	8.38% capital securities ...................................................	May 2007		May 2027		200		200
US$150m	9.50% subordinated debt ..................................................	-		Apr 2014		151		152
US$150m	7.75% Capital Trust pass through securities .....................	Nov 2006		Nov 2026		150		150
US$750m	5.00% subordinated notes ................................................	-		Sep 2020		746		745
US$250m	7.20% subordinated debentures ........................................	-		Jul 2097		215		214
	Other subordinated liabilities each less than US$150m .....					299		302
						1,961		1,963
HSBC Bank USA, N.A.
US$1,000m	4.625% subordinated notes ..............................................	-		Apr 2014		1,000		1,002
US$500m	6.00% subordinated notes  ...............................................	-		Aug 2017		513		516
US$1,250m	4.875% subordinated notes ..............................................	-		Aug 2020		1,262		1,263
US$1,000m	5.875% subordinated notes  .............................................	-		Nov 2034		1,081		1,151
US$750m	5.625% subordinated notes  .............................................	-		Aug 2035		811		864
US$700m	7.00% subordinated notes  ...............................................	-		Jan 2039		696		694
						5,363		5,490
HSBC Finance Corporation
US$1,000m	5.911% trust preferred securities6 ....................................	Nov 2015		Nov 2035		996		995
US$2,939m	6.676% senior subordinated notes7 ..................................	-		Jan 2021		2,182		2,180
						3,178		3,175
HSBC Bank Brazil S.A.
BRL383m	Subordinated certificates of deposit ..................................	-		Feb 2015		162		289
BRL500m	Subordinated floating rate certificates of deposit ..............	-		Dec 2016		212		464
	Other subordinated liabilities each less than US$150m8 ....					224		491
						598		1,244
HSBC Mexico, S.A.
MXN1,818m	Non-convertible subordinated obligations9 .......................	Sep 2013		Sep 2018		138		139
MXN2,273m	Non-convertible subordinated obligations9 .......................	Dec 2013		Dec 2018		173		173
US$300m	Non-convertible subordinated obligations9,10 ....................	Jun 2014		Jun 2019		240		240
						551		552
HSBC Bank Canada
CAD400m	4.80% subordinated debentures ........................................	Apr 2017		Apr 2022		403		438
CAD200m	4.94% subordinated debentures ........................................	Mar 2016		Mar 2021		188		201
CAD39m	Floating rate debentures ...................................................	Oct 1996		Nov 2083		37		39
						628		678

 

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
Other HSBC subsidiaries
	Other subordinated liabilities each less than US$200m9 ....					618		650
Total of subordinated liabilities issued by HSBC subsidiaries ...............................................................						28,583		30,469
Amounts owed to third parties by HSBC Holdings .............................................................................						22,308		20,569
						50,891		51,038

  1 The interest rate payable after September 2015 is the sum of the three-month sterling Libor plus 0.82%.

  2 The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80%.

  3 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.

  4 The interest margin increases by 0.5% from September 2015.

  5 In March 2013, HSBC called its callable subordinated floating rate notes at par.

  6 The distributions change in November 2015 to three-month dollar Libor plus 1.926%.

  7 Approximately 25% of the senior subordinated notes are held by HSBC Holdings.

  8 Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU.

  9 These securities are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU.

10 Approximately US$60m of the subordinated obligations are held by HSBC Holdings.

HSBC Holdings

	At 31 December
	2013		2012
	US$m		US$m
Subordinated liabilities:
-. at amortised cost .......................................................................................................................	14,167		11,907
-. designated at fair value (Note 27) ..............................................................................................	12,921		14,618
	27,088		26,525

 

HSBC Holdings' subordinated liabilities

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
Amounts owed to third parties1
US$488m	7.625% subordinated notes ..............................................	-		May 2032		554		579
US$222m	7.35% subordinated notes ................................................	-		Nov 2032		278		258
US$2,000m	6.5% subordinated notes ..................................................	-		May 2036		2,029		2,034
US$2,500m	6.5% subordinated notes ..................................................	-		Sep 2037		3,039		3,202
US$1,500m	6.8% subordinated notes ..................................................	-		Jun 2038		1,487		1,486
£250m	9.875% subordinated bonds2 ............................................	Apr 2013		Apr 2018		-		442
£900m	6.375% callable subordinated notes3 ................................	Oct 2017		Oct 2022		1,672		1,648
£650m	5.75% subordinated notes ................................................	-		Dec 2027		1,158		1,210
£650m	6.75% subordinated notes ................................................	-		Sep 2028		1,066		1,041
£750m	7.0% subordinated notes ..................................................	-		Apr 2038		1,288		1,264
£900m	6.0% subordinated notes ..................................................	-		Mar 2040		1,464		1,431
€1,600m	6.25% subordinated notes ................................................	-		Mar 2018		2,210		2,118
€1,750m	6.0% subordinated notes ..................................................	-		Jun 2019		2,884		2,882
€700m	3.625% callable subordinated notes4 ................................	Jun 2015		Jun 2020		1,007		974
€1,500m	3.375% callable subordinated notes5 ................................	Jun 2019		Jun 2024		2,075		-
						22,211		20,569
Amounts owed to HSBC undertakings
US$1,250m	4.61% fixed/floating subordinated notes6 .........................	Jun 2013		Jun 2043		-		1,264
€1,400m	5.3687% fixed/floating subordinated notes7 .....................	Mar 2014		Dec 2043		2,024		1,952
£500m	8.208% subordinated step-up cumulative notes ................	Jun 2015		Jun 2040		825		806
€750m	5.13% fixed/floating subordinated notes ..........................	Mar 2016		Dec 2044		1,137		1,043
US$900m	10.176% subordinated step-up cumulative notes ..............	Jun 2030		Jun 2040		891		891
						4,877		5,956
						27,088		26,525

1  Amounts owed to third parties represent securities included in the capital base of HSBC as lower tier 2 securities in accordance with guidance in the PRA's GENPRU.

2 In April 2013, HSBC Holdings called its £250m 9.875% subordinated bonds at par.

3  The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3%.