HSBC 2008 Annual Report Download - page 19

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Increased regulation of the financial services
industry could have an adverse effect on
HSBC’s operations
HSBC, its subsidiaries and its affiliates are subject to
extensive and increasing regulation, accounting
standards and interpretations thereof and legislation
in the various countries in which the Group operates.
From time to time, new laws are introduced,
including tax, consumer protection, privacy and
other legislation, which affect the operating
environment in which the Group operates. As a
result of the recent interventions by governments in
response to global economic conditions, it is widely
expected that there will be a substantial increase in
government regulation and supervision of the
financial services industry, including the imposition
of higher capital requirements and restrictions on
certain types of transaction structure. If enacted,
such new regulations could require additional capital
to be injected into HSBC’s subsidiaries and
affiliates, require HSBC to enter into business
transactions that are not otherwise part of its current
Group strategy, prevent HSBC from continuing
current lines of operations, restrict the type or
volume of transactions HSBC may enter into, limit
HSBC’s subsidiaries’ and affiliates’ ability to declare
dividends to HSBC, or set limits on or require the
modification of rates or fees that HSBC charges on
certain loan or other products. HSBC may also face
increased compliance costs and limitations on its
ability to pursue business opportunities. Separately,
the Basel II Accord’s requirement for financial
institutions to increase their capital in response to
deteriorating market conditions may have secondary
effects on lending, which could exacerbate the
current market downturn. These measures, alone or
in combination, could have an adverse effect on
HSBC’s operations.
In the UK for example, the Banking Act 2009
includes a ‘Special Resolutions Regime’ which gives
wide powers in respect of UK banks and their parent
companies to the UK Treasury, the FSA and the
Bank of England in circumstances where any such
UK bank has encountered, or is likely to encounter,
financial difficulties.
HSBC is subject to tax-related risks in the
countries in which it operates, which could
have an adverse effect on its operating
results
HSBC is subject to the substance and interpretation
of tax laws in all countries in which it operates.
A number of double taxation agreements entered into
between countries also affect the taxation of the
Group. Tax risk is the risk associated with changes
in tax law or in the interpretation of tax law. It also
includes the risk of changes in tax rates and the risk
of consequences arising from failure to comply with
procedures required by tax authorities. Failure to
manage tax risks could lead to increased tax charges,
including financial or operating penalties, for not
complying as required with tax laws.
Key performance indicators
The Board of Directors and the Group Management
Board monitor HSBC’s progress against its strategic
objectives. Progress is assessed by comparison with
the Group’s strategy, its operating plan targets and its
historical performance using both financial and non-
financial measures.
As a prerequisite for the vesting of Performance
Shares, the Remuneration Committee must satisfy
itself that HSBC Holdings’ financial performance
has shown a sustained improvement in the period
since the award date. In determining this, the
Remuneration Committee will take account of all
relevant factors but in particular comparisons against
the total shareholder return (‘TSR’) comparator
group with regard to the financial key performance
indicators (‘KPIs’) described below.
Financial KPIs
To support the Group’s strategy and ensure that
HSBC’s performance can be monitored,
management utilises a number of financial KPIs. The
table below presents these KPIs for the period from
2004 to 2008. At a business level, the KPIs are
complemented by a range of benchmarks which are
relevant to the planning process and to reviewing
business performance.
HSBC has published a number of key targets
against which future performance can be measured.
Financial targets have been set as follows: the return
on average total shareholders’ equity over the
medium term has been set at 15-19 per cent; the cost
efficiency ratio has been set in the range of 48-52 per
cent; and the TSR in the top half of that achieved by
peers. The cost efficiency ratio has been set as a
range within which the business is expected to
remain in order to accommodate the need for
continued investment in support of future business
growth.