HSBC 2015 Annual Report Download - page 334

Report of the independent auditors to the members of HSBC Holdings plc
Appendix
HSBC HOLDINGS PLC
332
Litigation and conduct
Nature of the area of focus Matters discussed with the GAC
HSBC, like other global banking institutions, is exposed to a
significant number of open legal cases and regulatory investigations
in a number of its markets. Given the business is geographically
dispersed, the same matter could be subject to investigation in
multiple jurisdictions.
Provisions of $4.5bn have been established to account for legal
settlements, regulatory fines, customer redress payments and
related operational costs.
The most significant provisions relate to Payment Protection
Insurance, Jaffe vs Household Inc, tax-related investigations and
Foreign Exchange market manipulation.
There is an inherent risk that conduct and legal exposures are not
identified and considered for financial reporting purposes on a
timely basis. Importantly, the decision to recognise a provision and
the basis of measurement are judgemental.
Each material provision was discussed with the GAC when established
or changed, including whether HSBC’s policy had been applied in an
appropriate manner.
A number of other matters, for which provisions were not established,
were discussed to ensure the appropriateness of that decision.
Specifically:
Legal cases: Group Legal provided to each GAC meeting an update on
the status of legal cases. Material matters were discussed during the
meeting and the need for changes to provisions considered. These
discussions considered whether all related litigation or investigations
about a specific matter had been identified.
Customer redress payments: The most significant provision has been
in relation to PPI. The change in approach to the provision as a result of
the FCA consultation paper released in November 2015 was discussed,
as well as the judgements made to reflect ongoing claim history.
Procedures performed to support our discussions and conclusions
• Controls designed to ensure the completeness and adequacy of current legal and regulatory provisions were tested. Regulatory
correspondence from material markets was also read, and a sample of legal expenses were reviewed.
• Open legal cases were discussed with Group Legal and in certain instances we obtained and reviewed the relevant regulatory and
litigation documents in order to assess the facts and circumstances.
• The range of reasonably possible outcomes was considered for material provisions to independently assess the appropriateness of the
judgement made by HSBC.
• The disclosures of conduct and legal exposures and provisions were assessed for completeness and accuracy.
• For customer redress, the provisioning models and underlying assumptions used, were independently assessed. For example, for PPI the
inputs examined included customer complaint volumes and response rates. For the material models testing was performed to check that
the models were maintained appropriately and relevant calculations within the models were re-performed.
Relevant references in the Annual Report and Accounts 2015
GAC Report, page 262.
Note 29: Provisions, page 421.
Note 40: Legal proceedings and regulatory matters, page 445.