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HSBC Holdings plc Threatens To Redomicile Citing Regulatory Pressure

In AGM statements published today, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) expresses regret for past misdemeanours but cites regulatory and structural changes in the UK banking scene as reasons for reconsidering its domicile.

The international bank is considering moving its headquarters out of the UK in what would be a blow to Britain’s reputation as the ‘place to be’ for all self-respecting international banking organisations.

Difficult times

HSBC’s chairman, Douglas Flint, reckons the recent past was difficult for the firm thanks to the organisation’s own failings. He acknowledges that shareholders, the public and all other interested parties will be disillusioned and frustrated over the bank’s behaviour on a number of fronts.

Mr Flint goes on to apologise for what he describes as inadequacies in controls that allowed unacceptable behaviours to occur undetected, and he accepts responsibility for the need to restore HSBC’s reputation and standing to where they should be. In what strikes me as fair comment, the chairman reckons that most of the bank’s employees, including its management, set out to do the right thing at work and they too are incensed at the damage done to the firm’s brand by a small number of individuals who broke the bank’s rules and circumvented management’s controls.

The bottom line is that HSBC paid a heavy price, he reckons. The company’s reputation is broken and the financial burden of unacceptable behaviour lands on HSBC’s shareholders in the form of fines, penalties, additional costs and opportunity costs arising from diversion of management time. It’s hard to argue with that. Indeed, a ten-year-old investment in HSBC Holdings will be showing something like a 20% capital loss at today’s 631p share price.

Tightening regulation

New regulation looks set to clarify individual responsibility in errant behaviours, and HSBC hopes wider sanctions will lead to greater individual accountability visited on those directly responsible for misdemeanours.

However, the banking industry suffered close to US$200bn of litigation costs over the last few years, and that led to repositioning of the entire industry, driven by regulatory and structural reforms. In the UK, such reforms include the requirement to ring-fence core UK financial services and activities within a bank’s wider operations.

Is the UK worth HSBC’s bother?

Such regulatory pressures raise the costs and complexities of trading in Britain, and HSBC is undertaking a strategic review, which includes the question, ‘should HSBC Holdings be headquartered in the UK?’  Such unintended consequences of banking reform, if HSBC does move home, will not be helpful if Britain is to maintain its commercial standing in the world.

Other factors will also influence HSBC’s ultimate decision, says the chairman, such as outcomes arising from current geopolitical tensions; political changes, currency and commodity price realignments; interest rate moves and the effectiveness of central banks’ unconventional policies; and, perhaps most importantly, eurozone membership uncertainties in the UK.

Is HSBC worth investors’ bother?

HSBC shares are up today, as investors apparently welcome the news the firm might relocate its HQ away from Britain. I’ll be honest: I can’t see the point in investing in any bank when there are so many great ‘real’ businesses available. Banks come with so many invisible risks, and they are so cyclical, that avoiding them completely gives us a much better chance of achieving good stock-market returns.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.