Deutsche Bank Fined HK$23.8 Million for Regulatory Breaches

Deutsche Bank has been fined HK$23.8 million by the Hong Kong securities regulator for regulatory breaches. The bank is one of the largest German banking groups and its income is divided among retail banking, investment banking, private banking, corporate banking, and asset management. At the end of 2024, Deutsche Bank managed EUR 666.3 billion in current deposits and EUR 478.9 billion in current loans.

The Hong Kong Securities and Futures Commission (SFC) has slapped Deutsche Bank with a HK$23.8 million penalty for widespread regulatory failures that led to clients being overcharged approximately HK$39 million in fees across multiple business lines. The German banking giant faced disciplinary action for five separate 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 were discovered 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 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, costing clients approximately HK$5 million.

The overcharging happened due to shortcomings in the bank's processes and implementation failures. 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.

Additionally, Deutsche Bank incorrectly valued 392 floating-rate debt instruments by treating them as fixed-rate bonds between November 2015 and December 2020, resulting in wrong portfolio valuations and overcharging 92 clients HK$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 due to IT issues with an outsourced vendor responsible for updating fund prices.

The bank's research division also failed to disclose investment banking relationships in 261 single-company reports and 1,590 industry reports published between September 2014 and September 2021. Furthermore, the bank assigned incorrect product risk ratings to 40 exchange-traded funds between August 2012 and December 2020, affecting 265 transactions involving 93 clients.

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, one of the largest German banking groups, 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 similar fine to Germany’s BaFin for regulatory breaches. However, this is far from the record penalties the bank has grown accustomed to, such as the $775 million fine from the U.S. Department of Justice for Libor rigging.

References:
[1] https://www.financemagnates.com/forex/regulation/deutsche-bank-clients-were-being-secretly-overcharged-for-years/