German investment banking firm Deutsche Bank has been fined $23.8m by Hong Kong’s Securities and Futures Commission (SFC) for regulatory violations.
The breaches as per the regulator involve client overcharges on management fees, misassigned product risk ratings, and inadequate disclosures in research reports.
The SFC’s action followed an investigation initiated by Deutsche Bank’s self-reports from December 2020 to December 2023.
The regulator discovered that between November 2015 and November 2023, the German investment banking firm failed to apply agreed discounted management fee rates to 39 Discretionary Portfolio Management accounts. This failure was attributed to procedural shortcomings.
According to SFC, this led to these accounts being overcharged. Additionally, incorrect valuation of 392 floating rate debt instruments using fixed interest rates affected client portfolio valuations. This resulted in overcharges on custodian and management fees for 92 clients.
Misvaluations in monthly statements of 16 private equity funds and three real estate funds also led to overcharges for 32 clients due to external vendor oversight and insufficient internal controls, said SFC. These issues culminated in approximately $39m in client fee overcharges.
Moreover, the SFC identified failures in Deutsche Bank’s disclosure of investment banking relationships. Between September 2014 and September 2021, the bank issued 261 single stock company reports and 1,590 industry reports without disclosing ties with certain Hong Kong-listed companies.
Further examination revealed that Deutsche Bank assigned incorrect risk ratings to 40 exchange-traded funds (ETFs), impacting 93 clients across 265 transactions from August 2012 to December 2020. The improper ratings resulted in risk mismatches for ten transactions where product risk exceeded clients’ risk tolerance levels.
The SFC criticised Deutsche Bank for not acting with due skill, care, diligence, or in the best interests of its clients and market integrity. The bank also failed to ensure accurate client information or comply with regulatory requirements, said the regulator.
In determining sanctions, the SFC considered Deutsche Bank’s steps to identify root causes, resolve issues, strengthen internal controls, refund overcharged fees, and its cooperation during the process.
