HSBC UK Bank Plc · DRN-5939271

The complaint Mr and Mrs B are unhappy that HSBC UK Bank Plc (trading as ‘First Direct’) haven’t refunded them after they reported being the victims of a scam. What happened In 2019, Mrs B met with a person she had known for years through a property investment course. This person told her that they had invested in an opportunity with a company I shall call ‘Company B’ and that it had been going well. They arranged a meeting between Mr and Mrs B and the directors of Company B at the company’s office. At the meeting, Mr and Mrs B were told that Company B traded in shares and foreign exchange (‘forex’) and had developed an algorithm which took advantage of small movements in prices in the opening and closing of the US stock market. They would keep a proportion of the profits and the rest would be returned to investors. Mr and Mrs B were shown how the algorithm operated and the directors discussed how quite a few property investors had taken this opportunity as it allowed them to spread their risk. Mr and Mrs B’s investment took the form of a managed trade agreement, where Mr and Mrs B would provide capital for Company B to trade. The agreement stated that the expected return was 40% from their investment, which would be paid alongside the capital after 12 months. Mr and Mrs B were also told that they would have an option to withdraw their funds if they dropped by 10%. Mr and Mrs B made a number of payments to Company B: Payment number Date Payment amount 1 8 May 2019 £50,000 2 28 May 2020 £5,200 3 22 January 2021 £20,000 4 12 February 2021 £130,000 21 February 2022 £4,700 credited to Mr and Mrs B’s account 21 February 2022 £3,300 credited to Mr and Mrs B’s account In April 2022, Mrs B tried to withdraw the £39,200 interest from the £130,000 investment but this was never received. Mr and Mrs B thought something wasn’t quite right at this stage and then soon after, Company B went into administration. There is now an ongoing police investigation into the matter. Mr and Mrs B reported the matter as a scam to First Direct via their professional representatives. First Direct declined to reimburse them as they said the company was in genuine liquidation and the matter was a civil dispute. Mr and Mrs B disagreed with this and brought their complaint to the Financial Ombudsman Service. Our Investigator looked at all the evidence provided and concluded that the matter was a scam, and that Mr and Mrs B should be partially reimbursed. First Direct disagreed and stated that it was too soon to determine the matter and that, under R3(1)(c) of the Contingent Reimbursement Model

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Code (‘CRM Code’), it was entitled to delay its decision. They also disagreed that they should be liable for a failed investment scheme which they couldn’t have reasonably detected/prevented, or provided an effective warning for at the time the payments were made. As First Direct disagreed with the view, the matter has come to me to decide. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. In deciding what’s fair and reasonable, I’m required to take into account relevant law and regulations; regulatory rules, guidance and standards; codes of practice; and, where appropriate, what I consider having been good industry practice at the time. In broad terms, the starting position at law is that a firm is expected to process payments and withdrawals that a customer authorises, in accordance with the Payment Services Regulations 2017 and the terms and conditions of the customer’s account. However, that isn’t the end of the story. First Direct did sign up to the voluntary CRM Code which offered reimbursement to some victims of Authorised Push Payment (‘APP’) scams. The CRM Code was in place from 28 May 2019 to 6 October 2024. As Mr and Mrs B made payments ranging from 8 May 2019 to 12 February 2021, their first payment didn’t fall under the scope of the CRM Code, but the other three payments did. Is it appropriate to determine this complaint now? As mentioned above, First Direct have argued that it is too soon to reach an outcome on this matter and that, under R3(1)(c) of the CRM Code, it can delay doing so. So I have considered whether it would be appropriate to delay my decision in the interests of fairness, as I understand that a police investigation is still ongoing. There may be circumstances and cases where it’s appropriate to wait for the outcome of external investigations and/or related court cases. But that isn’t necessarily so in every case, as it may be possible to reach conclusions on the main issues on the basis of evidence already available. And it may be that the investigations or proceedings aren’t looking at quite the same issues or doing so in the most helpful way. I’m conscious, for example, that any criminal proceedings that may ultimately take place might concern charges that don’t have much bearing on the issues in this complaint; and, even if the prosecution were relevant, any outcome other than a conviction might be little help in resolving this complaint because the Crown would have to satisfy a higher standard of proof (beyond reasonable doubt) than I’m required to apply (which is the balance of probabilities). In order to determine Mr and Mrs B’s complaint, I have to ask myself whether, on the balance of probabilities, the available evidence indicates that it’s more likely than not that Mr and Mrs B were the victims of a scam rather than a failed investment. But I wouldn’t proceed to that determination if I consider fairness to the parties demands that I delay doing so. I’m aware that Mr and Mrs B first raised their claim with First Direct on 22 April 2024 and I need to bear in mind that this service exists for the purpose of resolving complaints quickly and with minimum formality. With that in mind, I don’t think delaying giving Mr and Mrs B an answer for an unspecified length of time would be appropriate unless truly justified. And, as a general rule, I’d not be inclined to think it fair to the parties to a complaint to put off my decision unless, bearing in mind the evidence already available to me, a postponement is likely to help significantly when it comes to deciding the issues.

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I’m aware that external processes might result in some recoveries for Company B’s creditors/investors; in order to avoid the risk of double recovery, I think First Direct would be entitled to take, if it wishes, an assignment of the rights to all future distributions to Mr and Mrs B under those processes in respect of this investment before paying anything I might award to them on this complaint. For the reasons I discuss further below, I don’t think it’s necessary to wait for any further police investigation for me fairly to reach a decision on whether First Direct should reimburse Mr and Mrs B under the provisions of the CRM Code. Have Mr and Mrs B been the victims of an APP scam, as defined in the CRM Code? The CRM Code states that it does not apply to private civil disputes. However, Mr and Mrs B believe the matter is a scam. The relevant section of the CRM Code defines an APP scam as: “The Customer transferred funds to another person for what they believed were legitimate purposes but which were in fact fraudulent.” So for me to find that Mr and Mrs B had been the victim of a scam, rather than a civil dispute, I would need to be satisfied that: (a) There was a misalignment between Mr and Mrs B’s purpose for making the payment and the purpose of the directors of Company B in procuring the payment; and (b) The difference between the two purposes must be due to dishonest deception on the part of the directors of Company B One of the key considerations here is thinking about what were Company B’s intentions from the start of the process – did the directors of Company B intend to dishonestly deceive Mr and Mrs B? I appreciate there are challenges in establishing what another person’s intentions were and that I cannot know for sure. So I have considered all the available evidence to decide on balance what I think the directors of Company B’s intentions are likely to have been. Having looked at everything submitted, I think the matter was, on balance, a scam. Whilst there is some evidence of Company B taking part in forex trading to the sum of just under £5 million, it is disproportionate to the amount of funds received by clients to trade, which was around £28 million in total. Further to this, the figures we have seen suggest Company B made a loss on its trading activity, yet £19 million was still paid to investors as returns. I think the facts above suggest that something was untoward with the investment opportunity as customers were not receiving genuine returns, and the majority of money wasn’t actually being traded. This pattern is consistent with fraudulent schemes which pay customers so that they think their investments are performing well, which induces them into investing more. This suggests to me that Company B was a Ponzi scheme. So, for the reasons above, I think the matter was, on balance, likely to be a scam. Returning to the question of whether in fairness I should delay reaching a decision pending developments from external investigations, I have explained why I should only postpone a decision if I take the view that fairness to the parties demands that I should do so. In view of the evidence already available to me, however, I don’t consider it likely that postponing my decision would help significantly in deciding the issues. And, as regards the police’s investigations, there is no certainty as to what, if any, prosecutions may be brought in future, nor what, if any, new light they would shed on evidence and issues I’ve discussed.

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Having reached this conclusion, I have gone on to consider if I think Mr and Mrs B are entitled to reimbursement under the CRM Code for payments two to four. Should Mr and Mrs B be reimbursed under the CRM Code? Under the CRM Code, there are a number of reasons why a firm may not choose to reimburse a customer. Of particular relevance to this complaint are the reasons given below: • The customer ignored an effective warning in relation to the payment being made; or • In all the circumstances at the time of the payment, in particular the characteristics of the customer and the complexity and sophistication of the APP scam, the customer made the payment without a reasonable basis for believing that: o the payee was the person the customer was expecting to pay; o the payment was for genuine goods or services; and/or o the person or business with whom they transacted was legitimate Did First Direct provide an effective warning? ‘Effective warning’ is a defined term in the CRM Code, which also sets out minimum criteria a warning must meet if it’s to be considered effective. First Direct haven’t been able to provide the audit history for their online warnings, but they have provided their calls with Mrs B. I can’t see that they gave an effective warning on any of the calls as they didn’t discuss investment scams with Mrs B, despite her saying that this was the purpose of the payment. I also can’t see that they provided any evidence to suggest they showed effective warnings online when Mrs B made two of the payments. This means that they cannot rely on this provision to deny reimbursement. First Direct said they disagreed with the principle that they should be liable for a failed investment scheme which they couldn’t have provided an effective warning for at the time the payments were made. However, the CRM Code is a reimbursement scheme which doesn’t require First Direct to have been at fault, so I cannot agree with their argument here. Did Mr and Mrs B have a reasonable basis of belief? In this instance, I think that Mr and Mrs B did have a reasonable basis for believing that the investment opportunity was legitimate: - Mrs B was introduced to the investment by someone who she knew who had also invested. I think this recommendation would have given her confidence that the investment was legitimate. - Mr and Mrs B met the directors of Company B in person at their office and received a demonstration of how the algorithm worked. So, they would have been reassured that the premise of the investment was plausible and that the directors were genuine. - Mr and Mrs B were told that if their funds dropped by 10% then they would be able to withdraw the funds. I think this would have reassured them that there was a limit to their risk with the investment. - Mr and Mrs B had already made a payment to Company B and hadn’t experienced any issues with the investment.

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So based on the reasons above, I think that Mr and Mrs B had a reasonable basis of belief. This means that First Direct ought to reimburse them for payment two onwards under the terms of the CRM Code. Should Mr and Mrs B receive a refund for payment one? As mentioned above, payment one was made prior to the commencement of the CRM Code. Even though the CRM Code doesn’t apply in this instance, good industry practice still requires that firms be on the lookout for account activity or payments that are unusual or out of character to the extent that they might indicate financial harm is occurring. On spotting such a payment, the firm should take steps to satisfy themselves that the customer wasn’t at risk of financial harm due to fraud. In this instance, it looks as if Mrs B proactively called First Direct about her initial payment, was given advice to check she had received the details from a genuine source and then called back the next day to make the payment. Mrs B appears to have been open and honest in both calls in saying that she was making the payment for investment in shares, and she followed First Direct’s advice in checking the source of the payment request. I can’t see that First Direct gave any warnings about investment scams or asked her any questions to do with her investment. I think they should have asked her more about the investment considering the substantial size of the payment. However, even if they had asked Mrs B further questions and provided a warning, I don’t think this would have prevented the scam from occurring. I say this because Mrs B had been recommended to invest by a friend, she had visited the offices of Company B and had spoken to the directors, so First Direct would be reassured the investment was genuine. Recovery First Direct did not attempt recovery of funds as they considered the matter to be a civil dispute. However, I don’t think this makes them liable for the loss of payment one. This is because, given the amount of time that had passed between Mrs B making the payment and reporting the scam, there was no realistic chance that any of the funds remained. Overall, whilst I don’t think First Direct need to refund payment one for the reasons above, I do think Mr and Mrs B should be reimbursed for payments two to four under the CRM Code. Putting things right I think that First Direct should reimburse Mr and Mrs B’s loss from and including payment two. In calculating fair redress I’ve taken into account that Mr and Mrs B has received some reimbursement. I can see that Mr and Mrs B received £8,000 back that they understood to have been ‘profit/return’ from their investment. Given Mr and Mrs B were falling victims to a scam and their ‘investment’ wasn’t genuine, I don’t think this money should be attributed to any specific payment. Instead, I think this money should be deducted from the amount lost by apportioning it proportionately across all of the payments Mr and Mrs B made to the scam. This ensures that these credits are fairly distributed. To work this out, First Direct should take into account all of the payments Mr and Mrs B made to the scam, which I’ve set out in the table above. In this case, the ‘profit/returns’ received equals £8,000 and the total amount paid to the scam equals £205,200. First Direct should divide the ‘profits/returns’ by the total amount paid to the scam and multiply the product by 100. This gives the percentage of the loss that was received in ‘profits/returns’. Deducting that same percentage from the value of each payment

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after and including payment two gives the amount that should be reimbursed for each payment. Here the ‘profit/returns’ amount to 3.9% of the total paid to the scam. It follows that the outstanding loss from each payment after and including payment two should be reduced by the same percentage. That means First Direct should reimburse 96.1% of each payment after and including payment two. Please note that, for ease of reading, I’ve rounded the relevant percentages down to two decimal places, but First Direct should perform the calculation I’ve set out above to arrive at a more precise figure, as I have done to arrive at the figure below. After taking the steps set out above, I calculate the Mr and Mrs B’s outstanding loss from these payments to be £149,149.32. As there is an ongoing police investigation, it’s possible Mr and Mrs B may recover some further funds in the future. In order to avoid the risk of double recovery, First Direct is entitled to take, if it wishes, an assignment of the rights to all future distributions under the liquidation process in respect of this investment before paying the award. If the bank elects to take an assignment of rights before paying compensation, it must first provide a draft of the assignment to Mr and Mrs B for their consideration and agreement. My final decision I uphold this complaint against HSBC UK Bank Plc (trading as ‘First Direct’). If Mr B and Mrs B accept, HSBC UK Bank Plc should: - Reimburse Mr and Mrs B £149,149.32 - Pay 8% simple interest per year on this amount from the date that the claim was declined to the date that the funds are reimbursed. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr B and Mrs B to accept or reject my decision before 24 April 2026. Paula Lipkowska Ombudsman

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