Hong Kong’s
Securities and Futures Commission (SFC) slapped Deutsche Bank with a $23.8 million
penalty today (Wednesday), citing widespread failures that led to clients being
overcharged roughly $39 million in fees across multiple business lines.
The German
bank faced disciplinary action for five separate regulatory breaches spanning
from 2012 to 2023, including systematic overcharging of management fees,
botched valuations of debt instruments and funds, and failure to properly
disclose investment banking relationships in research reports.
The
violations came to light through Deutsche Bank’s own internal reviews between
2020 and 2023, when the bank reported the issues to Hong Kong authorities. The
SFC’s investigation revealed problems that stretched back more than a decade in
some cases.
The SFC said Deutsche Bank “failed to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market” in its disciplinary statement.
The most
significant breach involved 39 discretionary portfolio management accounts that
were charged standard management fees instead of agreed-upon discounted rates
between June 2016 and September 2022. This error alone cost clients
approximately $5 million.
The
overcharging happened due to what the SFC described as “shortcomings in
DB’s processes and failures in their implementation.” In some cases,
relationship managers failed to input discount requests into the bank’s system,
while in others, the system automatically reverted to standard rates after
portfolio switches without staff realizing discounted rates needed to be
re-entered.
Deutsche
Bank also incorrectly valued 392 floating-rate debt instruments by treating
them as fixed-rate bonds between November 2015 and December 2020. This led to
wrong portfolio valuations and resulted in 92 clients being overcharged €10,988
in total custodian and management fees.
A third
overcharging incident involved 16 private equity funds and three real estate
funds that were incorrectly valued between May 2022 and November 2023. An
outsourced vendor responsible for updating fund prices stopped doing so due to
IT issues but failed to properly escalate the problem. This resulted in 233
clients receiving incorrect monthly statements and 32 of them being overcharged
$493 in custodian fees.
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Research
Disclosure Failures Span Seven Years
Deutsche
Bank’s research division failed to disclose investment banking relationships in
261 single-company reports and 1,590 industry reports published between
September 2014 and September 2021. The bank’s global research disclosure system
missed relationships where mandates existed but fees hadn’t been received yet,
or where mandates weren’t properly marked as closed in client systems.
The bank
also assigned incorrect product risk ratings to 40 exchange-traded funds
between August 2012 and December 2020, affecting 265 transactions involving 93
clients. Ten transactions resulted in risk mismatches where products carried
higher risk than clients’ stated tolerance levels. The errors stemmed from
outdated guidelines and knowledge gaps among operations staff due to turnover.
This is not
the first time the SFC has dealt with Deutsche Bank. Nearly 10 years ago, it
banned one of the bank’s Korean employees for involvement in market
manipulation. In 2021, a former Deutsche Bank trader was sentenced to prison
for fraud.
Regulatory
Response Considers Cooperation
The SFC
noted that Deutsche Bank’s breaches were “inadvertent and did not involve
any deliberate or intentional misconduct.” The regulator factored in the
bank’s cooperation, including conducting internal reviews, strengthening
controls, refunding overcharged fees, and accepting the disciplinary action.
Deutsche
Bank has been registered in Hong Kong since 2008 to conduct securities dealing,
advisory services, corporate finance advice, and asset management activities.
The bank has already remediated the identified issues and enhanced its internal
systems, according to the SFC.
The fine
represents one of the larger penalties imposed by Hong Kong’s securities
regulator in recent years for operational failures. In March,
Deutsche Bank also paid a fine of a similar size to
Germany’s BaFin for regulatory breaches. However, this is far from the
record penalties the bank has grown accustomed to. One
example is the $775 million fine from the U.S. Department of Justice for
Libor rigging.
Hong Kong’s
Securities and Futures Commission (SFC) slapped Deutsche Bank with a $23.8 million
penalty today (Wednesday), citing widespread failures that led to clients being
overcharged roughly $39 million in fees across multiple business lines.
The German
bank faced disciplinary action for five separate regulatory breaches spanning
from 2012 to 2023, including systematic overcharging of management fees,
botched valuations of debt instruments and funds, and failure to properly
disclose investment banking relationships in research reports.
The
violations came to light through Deutsche Bank’s own internal reviews between
2020 and 2023, when the bank reported the issues to Hong Kong authorities. The
SFC’s investigation revealed problems that stretched back more than a decade in
some cases.
The SFC said Deutsche Bank “failed to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market” in its disciplinary statement.
The most
significant breach involved 39 discretionary portfolio management accounts that
were charged standard management fees instead of agreed-upon discounted rates
between June 2016 and September 2022. This error alone cost clients
approximately $5 million.
The
overcharging happened due to what the SFC described as “shortcomings in
DB’s processes and failures in their implementation.” In some cases,
relationship managers failed to input discount requests into the bank’s system,
while in others, the system automatically reverted to standard rates after
portfolio switches without staff realizing discounted rates needed to be
re-entered.
Deutsche
Bank also incorrectly valued 392 floating-rate debt instruments by treating
them as fixed-rate bonds between November 2015 and December 2020. This led to
wrong portfolio valuations and resulted in 92 clients being overcharged €10,988
in total custodian and management fees.
A third
overcharging incident involved 16 private equity funds and three real estate
funds that were incorrectly valued between May 2022 and November 2023. An
outsourced vendor responsible for updating fund prices stopped doing so due to
IT issues but failed to properly escalate the problem. This resulted in 233
clients receiving incorrect monthly statements and 32 of them being overcharged
$493 in custodian fees.
You may also like: Hong Kong Regulator Bans Broker Text Links After Phishing Scams Hit Traders
Research
Disclosure Failures Span Seven Years
Deutsche
Bank’s research division failed to disclose investment banking relationships in
261 single-company reports and 1,590 industry reports published between
September 2014 and September 2021. The bank’s global research disclosure system
missed relationships where mandates existed but fees hadn’t been received yet,
or where mandates weren’t properly marked as closed in client systems.
The bank
also assigned incorrect product risk ratings to 40 exchange-traded funds
between August 2012 and December 2020, affecting 265 transactions involving 93
clients. Ten transactions resulted in risk mismatches where products carried
higher risk than clients’ stated tolerance levels. The errors stemmed from
outdated guidelines and knowledge gaps among operations staff due to turnover.
This is not
the first time the SFC has dealt with Deutsche Bank. Nearly 10 years ago, it
banned one of the bank’s Korean employees for involvement in market
manipulation. In 2021, a former Deutsche Bank trader was sentenced to prison
for fraud.
Regulatory
Response Considers Cooperation
The SFC
noted that Deutsche Bank’s breaches were “inadvertent and did not involve
any deliberate or intentional misconduct.” The regulator factored in the
bank’s cooperation, including conducting internal reviews, strengthening
controls, refunding overcharged fees, and accepting the disciplinary action.
Deutsche
Bank has been registered in Hong Kong since 2008 to conduct securities dealing,
advisory services, corporate finance advice, and asset management activities.
The bank has already remediated the identified issues and enhanced its internal
systems, according to the SFC.
The fine
represents one of the larger penalties imposed by Hong Kong’s securities
regulator in recent years for operational failures. In March,
Deutsche Bank also paid a fine of a similar size to
Germany’s BaFin for regulatory breaches. However, this is far from the
record penalties the bank has grown accustomed to. One
example is the $775 million fine from the U.S. Department of Justice for
Libor rigging.
