The FSA has issued its largest ever retail fine of £10.5 million to HSBC because of inappropriate investment advice provided by one of its subsidiaries, NHFA Limited (NHFA) to elderly customers.

The banking giant estimates that the amount of compensation to be paid to NHFA customers will be approximately £29.3 million in addition to the fine.

Between 2005 and 2010 NHFA advised 2,485 customers to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs for elderly customers. The products were sold to individuals entering, or already in, long-term care and in many cases these elderly customers were reliant on the investments to pay for their care. Typically these investments are recommended for a minimum period of five years.

The FSA said that the advice and sales were unsuitable because in a number of cases the individual’s life expectancy was below the recommended five-year investment period. As a result customers with shorter life expectancies had to make withdrawals from these investments sooner than is recommended. The combination of withdrawals and product charges led to faster reduction of capital than should have been the case if customers had received the right advice. A review by a third party of a sample of customer files found unsuitable sales had been made to 87% of customers involving these types of investments.

It regulator ruled that it was clear that HSBC’s subsidiary, NHFA, had not considered the individual needs of its elderly customers and failed in many cases to recommend suitable products for their circumstances, for example higher fixed interest rate savings accounts and ISAs. It was also apparent that NHFA’s advisers failed to consider the tax status of customers before making a recommendation.

During the Relevant Period 2,485 customers invested in asset-backed products. The total amount invested was close to £285 million, meaning the average amount invested per customer was approximately £115,000.

The failings breached Principle 9 which states that a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment. HSBC is undertaking a past business review to determine if customers of NHFA or their families are entitled to redress and will contact customers directly. HSBC has indicated that it expects the cost of redress alone to be £29.3 million.

HSBC agreed to settle at an early stage entitling it to a 30% discount on its fine. It also demonstrated its commitment to making changes to its operations. HSBC closed NHFA to new business on 1 July 2011.

Tracey McDermott, acting director of enforcement and financial crime, said: “NHFA was trusted by its vulnerable and elderly customers. It breached that trust to sell them unsuitable products. This type of behaviour undermines confidence in the financial services sector.