HSBC's Pinnacle Review: A Setback for Asia Expansion

HONG KONG/SHANGHAI (Reuters) - HSBC Holdings Plc is reviewing expenses and operational controls at its China digital wealth business Pinnacle, in a move that could result in layoffs and mark an abrupt reversal of the lender's ambitious expansion plans in Asia, according to sources familiar with the matter.

The review, which began a few months ago, is focusing on staff salary structures and potentially inflated supplier expenses that have contributed to a sharp spike in costs outpacing revenues. The bank plans to complete the review by the end of this year, and the findings could impact Pinnacle's workforce.

Pinnacle, launched in 2020, offers insurance and fund products and was meant to expand HSBC's reach outside its limited physical branch presence in China. The bank has invested heavily in the region, committing $6 billion for investments in Asia in 2021, with half earmarked for Hong Kong and mainland China.

However, the Greater China region, which includes Hong Kong and Taiwan, is the only market globally where HSBC's wealth and personal banking business, which Pinnacle is part of, is not yet profitable. In the first half of 2024, the unit reported a loss of $46 million, compared to a loss of $90 million in the year-ago period.



The review of Pinnacle's staff compensation structure aims to incentivize sales growth by examining the current fixed salary model for salespeople. According to sources, salespeople at Pinnacle earn fixed salaries that are relatively higher than industry standards, but this structure does not provide a strong incentive for them to ramp up sales.

To address this issue, alternative compensation models could be considered to better align salespeople's interests with the company's goals. Some possible alternatives include commission-based compensation, performance-based bonuses, sales targets and incentives, and hybrid compensation models that combine elements from these approaches.

The review is also looking into multiple incidents of potentially inaccurate expenses incurred by the division, mainly involving suppliers. In one instance, an external event management company charged Pinnacle for more than two dozen customer engagement and promotional events in one day earlier this year, raising concerns about the accuracy of the expenses.

To prevent future violations and ensure that internal rules are followed, HSBC can take several steps, including strengthening supplier management, implementing a whistleblower policy, enhancing internal controls, monitoring and analyzing expenses, and communicating expectations to employees.

The Pinnacle review underscores the challenges HSBC faces in boosting revenue in China, where the bank has high hopes for its digital wealth management business. As the bank continues to invest in the region, it must address the operational and cost issues at Pinnacle to ensure the long-term success of its Asia expansion strategy.

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