Annual Financial Report - 51 of 56

RNS Number : 6418S

HSBC Holdings PLC

18 March 2016

 

21  Investments in subsidiaries

Accounting policy

HSBC classifies investments in entities which it controls as subsidiaries. HSBC's consolidation policy is described in Note 1(g). Subsidiaries which are structured entities are covered in Note 39. HSBC Holdings' investments in subsidiaries are stated at cost less impairment losses. Impairment losses recognised in prior periods are reversed through the income statement if there has been a change in the estimates used to determine the investment's recoverable amount since the last impairment loss was recognised.

Principal subsidiaries of HSBC Holdings

			At 31 December 2015
			Country of         incorporation       or registration		HSBC's interest in equity capital %		Issued equity capital			Share                                              class
Europe
HSBC Bank plc			England		100		£797m			Ordinary £1          Preferred Ordinary £1               Series 2 Third Dollar                    Preference $0.01                                Third Dollar                    Preference $0.01
HSBC France			France		99.99		€337m			Shares €5.00
HSBC Private Banking Holdings (Suisse) SA			Switzerland		100		CHF1,363m			Ordinary CHF1,000
HSBC Trinkaus & Burkhardt AG			Germany		80.65		€75.4m			Shares of no par value
Asia
Hang Seng Bank Limited1			Hong Kong		62.14		HK$9, 658m			Ordinary no par value
HSBC Bank Australia Limited			Australia		100		A$811m			Ordinary no par value
HSBC Bank (China) Company Limited			PRC5		100		RMB15,400m			Ordinary CNY1.00
HSBC Bank Malaysia Berhad			Malaysia		100		RM115m			Ordinary RM0.50
HSBC Bank (Taiwan) Limited			Taiwan		100		TWD34,800m			Ordinary TWD10.00
HSBC Life (International) Limited			Bermuda		100		HK$4,178m			Ordinary HK$1.00
The Hongkong and Shanghai Banking Corporation Limited			Hong Kong		100		HK$96,052m			Ordinary no par value                                   CIP2 $1.00                                 CRP3 $1.00                                  NIP4 $1.00
Middle East and North Africa
HSBC Bank Middle East Limited			Jersey		100		$931m			Ordinary $1.00                                 CRP3 $1.00
HSBC Bank Egypt S.A.E.			Egypt		94.53		EGP2,796m			Ordinary EGP84.00
North America
HSBC Bank Canada			Canada		100		C$1,225m			Common shares of no                                    par value
							C$500m			Preference shares of no                                    par value
HSBC Bank USA, N.A.			USA		100		$2m			Common $100
HSBC Finance Corporation			USA		100		-6			Common $0.01
HSBC Securities (USA) Inc.			USA		100		-6			Common $0.05
Latin America
HSBC Bank Brasil S.A. - Banco Múltiplo			Brazil		100		BRL6,402m			Shares of no par value
HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC			Mexico		99.99		MXN5,681m			Ordinary MXN2.00
1   Listed in Hong Kong.	3   Cumulative Redeemable Preference shares.							5   People's Republic of China.
2   Cumulative Irredeemable Preference shares.	4   Non-cumulative Irredeemable Preference shares.							6   Issued equity capital is less than $1m.

Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are included in Notes 26 'Debt securities in issue', 30 'Subordinated liabilities' and 34 'Non-controlling interests', respectively.

All the above subsidiaries are included in the HSBC consolidated financial statements. 

Details of all HSBC subsidiaries, as required under Section 409 of the Companies Act 2006, are set out on pages 458 to 469. The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East Limited, which operates mainly in the Middle East and North Africa, and HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group's risk appetite for the relevant country or region. HSBC's capital management process culminates in the annual Group capital plan, which is approved by the Board.

HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to this, there is no current or foreseen impediment to HSBC Holdings' ability to provide funding for such investments. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. During 2015, none of the Group's subsidiaries experienced significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries, with the exception of HSBC North America Holdings Inc., on paying dividends or repaying loans and advances.

The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 37.

Structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights

		Carrying value of total consolidated assets				Nature of SPE
		2015		2014
		$bn		$bn
Solitaire Funding Ltd		7.3		9.0		Securities investment conduit
Mazarin Funding Limited		1.9		3.9		Securities investment conduit
Barion Funding Limited		1.1		2.0		Securities investment conduit
Malachite Funding Limited		0.4		1.4		Securities investment conduit
HSBC Home Equity Loan Corporation I		-		1.9		Securitisation
HSBC Home Equity Loan Corporation II		1.6		0.9		Securitisation
Regency Assets Limited		15.2		11.0		Conduit

In addition to the above, HSBC consolidates a number of individually insignificant structured entities with total assets of $17.9bn (2014: $22.9bn). For further details, see Note 39.

In each of the above cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Subsidiaries with significant non-controlling interests

		2015		2014
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests		37.86%		37.86%
Place of business		Hong Kong		Hong Kong
		$m		$m
Profit attributable to non-controlling interests		1,364		760
Accumulated non-controlling interests of the subsidiary		5,866		5,765
Dividends paid to non-controlling interests		523		513
Summarised financial information:
- total assets		169,813		160,769
- total liabilities		153,458		144,642
- net operating income before loan impairment		5,411		3,687
- profit for the year		3,604		2,007
- total comprehensive income for the year		1,636		4,460

22  Prepayments, accrued income and other assets

		2015		2014
		$m		$m
Prepayments and accrued income		7,765		10,554
Bullion		11,501		15,726
Endorsements and acceptances		9,149		10,775
Reinsurers' share of liabilities under insurance contracts (Note 28)		1,378		1,032
Employee benefit assets (Note 6)		5,272		5,028
Other accounts		9,410		13,882
Property, plant and equipment		9,923		10,532
At 31 December		54,398		67,529

Prepayments, accrued income and other assets included $25,310m (2014: $33,889m) of financial assets, the majority of which were measured at amortised cost.

23  Assets held for sale and liabilities of disposal groups held for sale

Accounting policy

Assets held for sale Assets and liabilities of disposal groups and non-current assets are classified as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. Held-for-sale assets and liabilities are measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'. Immediately before the initial classification as held for sale, the carrying amounts of the relevant assets and liabilities are measured in accordance with applicable IFRSs. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities that are not within the scope of the measurement requirements of IFRS 5, but are included in a disposal group classified as held for sale, are remeasured under applicable IFRSs before the fair value less costs to sell of the disposal group is determined.

		2015		2014
		$m		$m
Held for sale at 31 December
Disposal groups		41,715		6,883
Non-current assets held for sale		2,185		764
Total assets		43,900		7,647
Liabilities of disposal groups		36,840		6,934

 

Disposal groups

Brazil

In the first half of 2015, we announced the plan to sell our operations in Brazil. At 31 December 2015, the sale was considered highly probable and therefore the assets and liabilities of the disposal group were classified as held for sale. The disposal group includes the assets and liabilities expected to be sold plus allocated goodwill as set out in the table on page 417.

The disposal group is measured at its carrying amount at 31 December 2015, which is lower than its fair value less cost to sell. The carrying amount includes a $1.3bn deferred tax asset and $1.3bn of allocated goodwill (see Note 20). The assets and liabilities of the disposal group have been reclassified from their individual lines in the consolidated balance sheet and are presented in separate 'Held for sale' lines at 31 December 2015. There is no change to the comparative balance sheet presentation and there is no separate presentation in the income statement.

At 31 December 2015, there were no significant accounting implications in respect of the planned sale although this may evolve as it progresses. The disposal group represents a foreign operation and when the disposal completes the cumulative amount of associated exchange differences previously recognised in other comprehensive income will be reclassified to the income statement. At 31 December 2015, there was a cumulative loss of $2.6bn in the Group's foreign exchange reserve attributable to the Brazilian operations.

The major classes of assets and associated liabilities of disposal groups held for sale are as follows:

		Brazil		Other		Total
		$m		$m		$m
Assets of disposal groups held for sale
Trading assets		55		-		55
Fair value of financial assets designated at fair value		3,123		-		3,123
Loans and advances to banks		4,068		-		4,068
Loans and advances to customers		17,001		40		17,041
Reverse repurchase agreements		3,511		-		3,511
Financial investments		6,238		-		6,238
Goodwill and intangible assets		1,680		-		1,680
Deferred tax asset1		1,325		-		1,325
Prepayments, accrued income and other assets		4,674		-		4,674
Total assets at 31 December 2015		41,675		40		41,715
Liabilities of disposal groups held for sale
Deposits by banks		1,521		-		1,521
Customer accounts		15,094		1,588		16,682
Debt securities in issue		7,957		-		7,957
Liabilities under insurance contracts		3,338		-		3,338
Accruals, deferred income and other liabilities		7,335		7		7,342
Total liabilities at 31 December 2015		35,245		1,595		36,840
Expected date of completion		First Half of 2016		First Half of 2016
Operating segment		Latin America		North America
Fair value of selected financial instruments which are not carried at fair value on the balance sheet at 31 December 2015
Loans and advances to banks and customers		20,912		40		20,952
Customer accounts		15,094		1,588		16,682

1       The recognition of deferred tax assets relies on an assessment of the probability and sufficiency of future taxable profits and future reversals of existing taxable temporary differences. In recognising the deferred tax asset management has critically assessed all available information, including sufficiency of future taxable profits using internal and external benchmarks, and historical performance.

24  Trading liabilities

Accounting policy

Financial liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. They are recognised on trade date, when HSBC enters into contractual arrangements with counterparties, and are normally derecognised when extinguished. They are initially measured at fair value, with transaction costs taken to the income statement. Subsequent changes in fair value and interest are recognised in the income statement in 'Net trading income'. Liabilities arising from the sale of borrowed securities are classified as held for trading.

Trading liabilities

		2015 $m		2014 $m
Deposits by banks1		27,054		41,453
Customer accounts1,2		40,208		50,600
Other debt securities in issue (Note 26)3		30,525		33,602
Other liabilities - net short positions in securities		43,827		64,917
At 31 December		141,614		190,572

1   'Deposits by banks' and 'Customer accounts' include repos, settlement accounts, stock lending and other amounts.

2   Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor.

3   'Other debt securities in issue' comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.

At 31 December 2015, the cumulative amount of change in fair value attributable to changes in HSBC's credit risk was a gain of $122m (2014: loss of $79m).

25  Financial liabilities designated at fair value

Accounting policy

The criteria for designating instruments at fair value and their measurement are described in Note 15. The fair value designation, once made, is irrevocable. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties and are normally derecognised when extinguished. Examples of such designations include: Long-term debt issues The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, and this mismatch is eliminated through the fair value designation. Financial liabilities under unit-linked and non-linked investment contracts HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts insignificant insurance risk from another party is not classified as an insurance contract, but is accounted for as a financial liability. See Note 28 for contracts where HSBC accepts significant insurance risk. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries and the corresponding financial assets are designated at fair value. Liabilities are at least equivalent to the surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or indices. Premiums receivable and amounts withdrawn are accounted for as increases or decreases in the liability recorded in respect of investment contracts. The incremental costs directly related to the acquisition of new investment contracts or renewing existing investment contracts are deferred and amortised over the period during which the investment management services are provided.

Financial liabilities designated at fair value - HSBC

		2015		2014
		$m		$m
Deposits by banks and customer accounts		193		160
Liabilities to customers under investment contracts		6,027		6,312
Debt securities in issue (Note 26)		37,678		46,364
Subordinated liabilities (Note 30)		21,168		21,822
Preferred securities (Note 30)		1,342		1,495
At 31 December		66,408		76,153

The carrying amount at 31 December 2015 of financial liabilities designated at fair value was $4,147m more than the contractual amount at maturity (2014: $5,813m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a gain of $158m (2014: loss of $870m).

Financial liabilities designated at fair value - HSBC Holdings

		2015		2014
		$m		$m
Debt securities in issue (Note 26):
-  owed to third parties		7,897		8,185
Subordinated liabilities (Note 30):
-  owed to third parties		11,100		9,513
-  owed to HSBC undertakings		856		981
At 31 December		19,853		18,679

The carrying amount at 31 December 2015 of financial liabilities designated at fair value was $2,127m more than the contractual amount at maturity (2014: $2,694m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of $172m (2014: loss of $520m).

26  Debt securities in issue

Accounting policy

Financial liabilities for debt securities issued are recognised when HSBC enters into contractual arrangements with counterparties and are initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. The subsequent measurement of financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over their expected life.

Debt securities in issue - HSBC

		2015		2014
		$m		$m
Bonds and medium-term notes		128,348		132,539
Other debt securities in issue		28,804		43,374
		157,152		175,913
Of which debt securities in issue reported as:
-  trading liabilities (Note 24)		(30,525)		(33,602)
-  financial liabilities designated at fair value (Note 25)		(37,678)		(46,364)
At 31 December		88,949		95,947

Debt securities in issue - HSBC Holdings

		2015		2014
		$m		$m
Debt securities		8,857		9,194
Of which debt securities in issue reported as:
-  financial liabilities designated at fair value (Note 25)		(7,897)		(8,185)
At 31 December		960		1,009

27  Accruals, deferred income and other liabilities

		2015		2014
		$m		$m
Accruals and deferred income		11,129		15,075
Amounts due to investors in funds consolidated by HSBC		474		782
Obligations under finance leases		37		67
Endorsements and acceptances		9,135		10,760
Employee benefit liabilities (Note 6)		2,809		3,208
Other liabilities		14,532		16,570
At 31 December		38,116		46,462

Accruals, deferred income and other liabilities include $29,358m (2014: $39,846m) of financial liabilities, the majority of which are measured at amortised cost.

28  Liabilities under insurance contracts

Accounting policy

HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. Liabilities under insurance contracts Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices. A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is identified it is charged immediately to the income statement. Future profit participation on insurance contracts with DPF Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past distribution policy. Investment contracts with DPF While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as permitted by IFRS 4 'Insurance Contracts'. The Group therefore recognises the premiums for those contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability. In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

Liabilities under insurance contracts

		Gross		Reinsurers' share		Net
		$m		$m		$m
Non-linked insurance contracts1
At 1 January 2015		36,973		(772)		36,201
Claims and benefits paid		(3,200)		153		(3,047)
Increase in liabilities to policyholders		7,746		(575)		7,171
Disposals/transfers to held-for-sale		(443)		6		(437)
Exchange differences and other movements		(538)		73		(465)
At 31 December 2015		40,538		(1,115)		39,423
Investment contracts with DPF
At 1 January 2015		25,068		-		25,068
Claims and benefits paid		(2,101)		-		(2,101)
Increase in liabilities to policyholders		2,728		-		2,728
Exchange differences and other movements2		(3,086)		-		(3,086)
At 31 December 2015		22,609		-		22,609
Linked life insurance contracts
At 1 January 2015		11,820		(260)		11,560
Claims and benefits paid		(1,869)		64		(1,805)
Increase in liabilities to policyholders		1,398		(5)		1,393
Disposals/transfers to held-for-sale		(4,594)		-		(4,594)
Exchange differences and other movements3		36		(62)		(26)
		6,791				6,528
At 31 December 2015		6,791		(263)		6,528
Total liabilities to policyholders at 31 December 2015		69,938		(1,378)		68,560
Non-linked insurance contracts1
At 1 January 2014		33,950		(1,118)		32,832
Claims and benefits paid		(3,575)		175		(3,400)
Increase in liabilities to policyholders		7,764		(409)		7,355
Disposals/transfers to held-for-sale		(589)		527		(62)
Exchange differences and other movements		(577)		53		(524)
At 31 December 2014		36,973		(772)		36,201
Investment contracts with DPF
At 1 January 2014		26,427		-		26,427
Claims and benefits paid		(2,175)		-		(2,175)
Increase in liabilities to policyholders		3,188		-		3,188
Exchange differences and other movements2		(2,372)		-		(2,372)
At 31 December 2014		25,068		-		25,068
Linked life insurance contracts
At 1 January 2014		13,804		(290)		13,514
Claims and benefits paid		(1,499)		88		(1,411)
Increase in liabilities to policyholders		2,762		33		2,795
Disposals/transfers to held-for-sale		(2,547)		74		(2,473)
Exchange differences and other movements3		(700)		(165)		(865)
At 31 December 2014		11,820		(260)		11,560
Total liabilities to policyholders at 31 December 2014		73,861		(1,032)		72,829

1   'Non-linked insurance contracts' includes liabilities under non-life insurance contracts.

2   'Exchange differences and other movements' includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised investment gains recognised in other comprehensive income.

3   'Exchange differences and other movements' includes amounts arising under reinsurance agreements.

The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to policyholders in the year. The key factors contributing to the movement in liabilities to policyholders included death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.

29  Provisions

Accounting policy

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation which has arisen as a result of past events and for which a reliable estimate can be made.

 

Critical accounting estimates and judgements

Provisions Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Professional expert advice is taken on the assessment of litigation, property (including onerous contracts) and similar obligations. Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around a better defined set of possible outcomes. However, the amount provisioned can remain very sensitive to the assumptions used. There could be a wide range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved. Provisions for customer remediation also require significant levels of estimation and judgement. The amounts of provisions recognised depend on a number of different assumptions, for example, the volume of inbound complaints, the projected period of inbound complaint volumes, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint.

 

Provisions

		Restructuring costs		Contractual commitments		Legal proceedings and regulatory matters		Customer remediation		Other provisions		Total
		$m		$m		$m		$m		$m		$m
At 1 January 2015		197		234		2,184		1,831		552		4,998
Additional provisions/increase in provisions		430		120		2,153		765		138		3,606
Provisions utilised		(95)		(2)		(619)		(856)		(159)		(1,731)
Amounts reversed		(29)		(15)		(95)		(170)		(133)		(442)
Unwinding of discounts		-		-		40		6		-		46
Exchange differences and other movements		(40)		(97)		(489)		(236)		(63)		(925)
At 31 December 2015		463		240		3,174		1,340		335		5,552
At 1 January 2014		271		177		1,832		2,382		555		5,217
Additional provisions/increase in provisions		147		136		1,752		1,440		154		3,629
Provisions utilised		(143)		(2)		(1,109)		(1,769)		(112)		(3,135)
Amounts reversed		(43)		(46)		(281)		(184)		(66)		(620)
Unwinding of discounts		-		1		43		10		11		65
Exchange differences and other movements		(35)		(32)		(53)		(48)		10		(158)
At 31 December 2014		197		234		2,184		1,831		552		4,998

Further details of 'Legal proceedings and regulatory matters' are set out in Note 40. 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.

Further details of 'Customer remediation' are set out in this note. 'Customer remediation' refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) 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 often 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

At 31 December 2015, a provision of $1,039m (2014: $1,079m) was held relating to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years. An increase in provisions of $549m was recognised during the year, primarily reflecting an increase in inbound complaints by claims management

companies compared with previous forecasts and management's current best estimate of the impact on provisions of the FCA consultation on the introduction of a time bar and the 2014 decision of the UK Supreme Court ('Plevin'). The current projected trend of inbound complaint volumes implies that the redress programme will be completed by the first half of 2018 taking into account the likely impact of a time bar. (2014 assumption: first quarter of 2018). Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amounted to $4.7bn of which $3.6bn had been paid as at 31 December 2015.

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 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of approximately $4.0bn at 2015 average exchange rates. The gross written premiums on these policies was approximately $5.2bn.  At 31 December 2015, the estimated total complaints expected to be received was 1.9m, representing 35% of total policies sold. It is estimated that contact will be made with regard to 2.3m policies, representing 42% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

The cumulative number of PPI complaints received to 31 December 2015 and the number of future claims expected

		Cumulative to         31 December                          2015		Future                  expected
Inbound complaints1 (000s of policies)		1,215		336
Outbound contact (000s of policies)		624		101
Response rate to outbound contact		44%		52%
Average uphold rate per claim2		74%		81%
Average redress per claim ($)		3,058		2,844
Complaints to FOS (000s of policies)		121		51
Average uphold rate per FOS claim		36%		53%

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 $221m at 2015 average exchange rates. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $15m.

The decision under Plevin held that, judged on its own facts, non-disclosure of the amount of commissions payable in connection with the sale of PPI to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act ('CCA'). The FCA has issued a consultation on proposed rules and guidelines in relation to the application of this ruling, together with a proposal for the introduction of a time bar. HSBC has reflected its current best estimate of the impact of these matters in the provision held as at 31 December 2015. There remains uncertainty as to what the eventual outcome of the consultation will be: HSBC will continue to review provisioning levels as further facts become known.

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.

Interest rate derivatives

At 31 December 2015, a provision of $87m (2014: $312m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the estimated redress payable to customers in respect of historical payments under derivative contracts. A release to the provision of $38m (2014: $288m increase) was recorded during the year.

UK Consumer Credit Act

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the CCA. $167m was recognised at 31 December 2015 within 'Accruals, deferred income and other liabilities' for the repayment of interest to customers (2014: $379m), primarily where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did refer to this right. The cumulative liability to date was $569m (2014: $591m), of which payments of $414m (2014: $212m) have been made to customers. There is uncertainty as to whether other technical requirements of the CCA have been met.

Brazilian labour, civil and fiscal claims

Brazilian labour, civil and fiscal litigation provisions were $363m (2014: $501m) as at 31 December 2015. Of these provisions, $168m (2014: $246m) was 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. These provisions form part of the Brazilian disposal group and were classified as 'held for sale' at 31 December 2015 (see Note 23).

30  Subordinated liabilities

HSBC

		2015		2014
		$m		$m
Subordinated liabilities
At amortised cost		22,702		26,664
- subordinated liabilities		20,773		22,355
- preferred securities		1,929		4,309
Designated at fair value (Note 25)		22,510		23,317
- subordinated liabilities		21,168		21,822
- preferred securities		1,342		1,495
At 31 December		45,212		49,981
HSBC Holdings		26,062		25,277
Other HSBC		19,150		24,704
At 31 December		45,212		49,981

 

HSBC's subordinated liabilities

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 due to the inclusion of issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.

HSBC's subordinated liabilities in issue

		First call date		Maturity date		2015 $m		2014 $m
Additional tier 1 capital securities guaranteed by HSBC Holdings plc1
£500m	8.208% non-cumulative step-up perpetual preferred securities2	Jun 2015				-		779
€750m	5.13% non-cumulative step-up perpetual preferred securities3	Mar 2016				856		979
$900m	10.176% non-cumulative step-up perpetual preferred securities, series 2	Jun 2030				891		891
						1,747		2,649
Additional tier 1 capital securities guaranteed by HSBC Bank plc1
£300m	5.862% non-cumulative step-up perpetual preferred securities	Apr 2020				488		515
£700m	5.844% non-cumulative step-up perpetual preferred securities	Nov 2031				1,038		1,091
						1,526		1,606
Tier 2 securities issued by HSBC Bank plc
£500m	4.75% callable subordinated notes4	Sep 2015		Sep 2020		-		802
£350m	5.00% callable subordinated notes5	Mar 2018		Mar 2023		562		605
£300m	6.50% subordinated notes	-		Jul 2023		444		466
£350m	5.375% callable subordinated step-up notes6	Nov 2025		Nov 2030		569		620
£500m	5.375% subordinated notes	-		Aug 2033		846		905
£225m	6.25% subordinated notes	-		Jan 2041		332		349
£600m	4.75% subordinated notes	-		Mar 2046		879		924
€500m	Callable subordinated floating rate notes4	Sep 2015		Sep 2020		-		588
$300m	7.65% subordinated notes	-		May 2025		386		400
$750m	Undated floating rate primary capital notes	Jun 1990				750		750
$500m	Undated floating rate primary capital notes	Sep 1990				500		500
$300m	Undated floating rate primary capital notes, series 3	Jun 1992				300		300
						5,568		7,209

		First call date		Maturity date		2015 $m		2014 $m
Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd
$400m	Primary capital undated floating rate notes7	Aug 1990				401		403
$400m	Primary capital undated floating rate notes (second series)8	Dec 1990				-		401
$400m	Primary capital undated floating rate notes (third series)	Jul 1991				400		400
						801		1,204
Tier 2 securities issued by HSBC Bank Australia Limited
AUD200m	Callable subordinated floating rate notes9	Nov 2015		Nov 2020		-		164
						-		164
Tier 2 securities issued by HSBC Bank Malaysia Berhad
MYR500m	4.35% subordinated bonds	Jun 2017		Jun 2022		116		143
MYR500m	5.05% subordinated bonds	Nov 2022		Nov 2027		116		144
						232		287
Tier 2 securities issued by HSBC USA Inc.
$200m	7.808% capital securities10	Dec 2006		Dec 2026		-		200
$200m	8.38% capital securities10	May 2007		May 2027		-		200
$150m	7.75% Capital Trust pass through securities10	Nov 2006		Nov 2026		-		150
$750m	5.00% subordinated notes	-		Sep 2020		747		738
$250m	7.20% subordinated debentures	-		Jul 2097		220		216
	Other subordinated liabilities each less than $150m11					299		297
						1,266		1,801
Tier 2 securities issued by HSBC Bank USA, N.A.
$500m	6.00% subordinated notes	-		Aug 2017		502		508
$1,250m	4.875% subordinated notes	-		Aug 2020		1,258		1,210
$1,000m	5.875% subordinated notes	-		Nov 2034		1,142		1,245
$750m	5.625% subordinated notes	-		Aug 2035		850		934
$700m	7.00% subordinated notes	-		Jan 2039		691		676
						4,443		4,573
Tier 2 securities issued by HSBC Finance Corporation
$1,000m	5.911% trust preferred securities9	Nov 2015		Nov 2035		-		998
$2,939m	6.676% senior subordinated notes12	-		Jan 2021		2,188		2,185
						2,188		3,183
Tier 2 securities issued by HSBC Bank Brazil S.A.13
BRL383m	Subordinated certificates of deposit	-		Feb 2015		-		144
BRL500m	Subordinated floating rate certificates of deposit	-		Dec 2016		-		188
	Other subordinated liabilities each less than $150m11					-		81
						-		413
Tier 2 securities issued by HSBC Bank Canada
CAD400m	4.80% subordinated debentures	Apr 2017		Apr 2022		298		367
CAD200m	4.94% subordinated debentures7	Mar 2016		Mar 2021		144		172
CAD39m	Floating rate debentures	Oct 1996		Nov 2083		29		34
						471		573
Securities issued by HSBC Mexico, S.A.
MXN1,818m	Non-convertible subordinated obligations14	Sep 2013		Sep 2018		105		124
MXN2,273m	Non-convertible subordinated obligations14	Dec 2013		Dec 2018		131		154
$300m	Non-convertible subordinated obligations14,15	Jun 2014		Jun 2019		240		240
						476		518
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than $200m11						432		524
Subordinated liabilities issued by HSBC subsidiaries at 31 December						19,150		24,704

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

  2    In June 2015, HSBC called and redeemed £500m 8.208% non-cumulative step-up perpetual preferred securities at par.

  3   In February 2016, HSBC gave notice that it will call and redeem the €750m 5.13% non-cumulative step-up perpetual preferred securities.

  4   In September 2015, HSBC called and redeemed £500m 4.75% callable subordinated notes and €500m callable subordinated floating rate notes at par.

  5   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%.

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

  7   In January 2016, HSBC gave notice that it will call and redeem the $400m Primary capital undated floating rate notes and CAD200m 4.94% subordinated debentures.

  8   In December 2015, HSBC called and redeemed $400m Primary capital undated floating rate notes at par.

  9   In November 2015, HSBC called and redeemed $1,000m 5.911% trust preferred securities and AUD 200m callable subordinated floating rate notes at par.

10   In June 2015, HSBC called and redeemed $200m 7.808% capital securities, $200m 8.38% capital securities, and $150m 7.75% Capital Trust pass through securities at par.

11   Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.

12   Approximately $731m of the senior subordinated notes are held by HSBC Holdings.

13   Included in Note 23, Assets held for sale and liabilities of disposal groups held for sale.

14   These securities are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.

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

HSBC Holdings

		2015		2014
		$m		$m
Subordinated liabilities:
- at amortised cost		15,895		17,255
- designated at fair value (Note 25)		11,956		10,494
At 31 December		27,851		27,749

HSBC Holdings' subordinated liabilities

		First call                  date		Maturity                  date		2015 $m		2014 $m
Tier 2 securities issued by HSBC Holdings plc
Amounts owed to third parties
$488m	7.625% subordinated notes1	-		May 2032		531		538
$222m	7.35% subordinated notes1	-		Nov 2032		278		278
$2,000m	6.5% subordinated notes1	-		May 2036		2,029		2,029
$2,500m	6.5% subordinated notes1	-		Sep 2037		3,085		3,278
$1,500m	6.8% subordinated notes1	-		Jun 2038		1,487		1,487
$2,000m	4.25% subordinated notes2,5	-		Mar 2024		2,078		2,069
$1,500m	5.25% subordinated notes2,5	-		Mar 2044		1,735		1,735
$1,500m	4.25% subordinated notes2	-		Aug 2025		1,529		-
£900m	6.375% callable subordinated notes1,3	Oct 2017		Oct 2022		1,432		1,558
£650m	5.75% subordinated notes2	-		Dec 2027		1,079		1,176
£650m	6.75% subordinated notes2	-		Sep 2028		955		1,005
£750m	7.0% subordinated notes2	-		Apr 2038		1,159		1,217
£900m	6.0% subordinated notes2	-		Mar 2040		1,310		1,379
€1,600m	6.25% subordinated notes2	-		Mar 2018		1,748		1,950
€1,750m	6.0% subordinated notes2	-		Jun 2019		2,284		2,623
€700m	3.625% callable subordinated notes1,4	Jun 2015		Jun 2020		-		878
€1,500m	3.375% callable subordinated notes2,5	Jan 2019		Jan 2024		1,694		1,898
€1,500m	3.0% subordinated notes2	-		Jun 2025		1,691		-
						26,104		25,098
Amounts owed to HSBC undertakings
£500m	8.208% subordinated step-up cumulative notes4	Jun 2015		Jun 2040		-		779
€750m	5.13% fixed/floating subordinated notes	Mar 2016		Dec 2044		856		981
$900m	10.176% subordinated step-up cumulative notes	Jun 2030		Jun 2040		891		891
						1,747		2,651
At 31 December						27,851		27,749

1   Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules.

2   These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.

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

4   In June 2015, HSBC Holdings called and redeemed the €700m 3.625% callable subordinated notes and £500m 8.208% non-cumulative step-up perpetual preferred securities at par.

5   These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.

Additional tier 1 capital securities

HSBC has included three types of additional tier 1 capital securities in its tier 1 capital. Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred or cancelled at the discretion of HSBC Holdings. The securities presented in this Note are accounted for as liabilities because HSBC has an obligation to pay dividends in perpetuity. See Note 35 for the other two types of additional tier 1 capital securities accounted for as equity.

The additional tier 1 securities presented in this section do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.

Guaranteed by HSBC Holdings or HSBC Bank plc

The five capital securities above that are guaranteed on a subordinated basis by HSBC Holdings or HSBC Bank plc ('HSBC Bank') and 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 additional tier 1 capital for HSBC under CRD IV by virtue of the application of grandfathering provisions, and the two capital securities guaranteed by HSBC Bank also qualify as additional tier 1 capital for HSBC Bank (on a solo and a consolidated basis) under CRD IV by virtue of the same grandfathering process.

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.

Tier 2 capital securities

These capital securities are included within HSBC's regulatory capital base as tier 2 capital under CRD IV by virtue of the application of grandfathering provisions (with the exception of identified HSBC Holding securities which are compliant with CRD IV end point rules). Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an obligation to pay coupons. In accordance with CRD IV, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.

31  Maturity analysis of assets, liabilities and off-balance sheet commitments

The table on page 427 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. Asset and liability balances are included in the maturity analysis as follows:

·   except for reverse repos, repos and debt securities in issue, trading assets and liabilities (including trading derivatives) are included in the 'Due not more than 1 month' time bucket, and not by contractual maturity because trading balances are typically held for short periods of time;

·   financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket;

·   non-financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill and intangible assets, current and deferred tax assets and liabilities and retirement benefit liabilities) are included in the 'Due over 5 years' time bucket;

·   financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction; and

·   liabilities under insurance contracts are included in the 'Due over 5 years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are classified based on the contractual notice period investors are entitled to give. Where there is no contractual notice period, undated contracts are included in the 'Due over 5 years' time bucket.

Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.

 

END

 

 

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