Hong Kong's Securities and Futures Commission (SFC) slapped Deutsche Bank with a $23.8 million penalty today (Wednesday), citing widespread failures that led to clients being overcharged roughly $39 million in fees across multiple business lines.

The German bank faced disciplinary action for five separate regulatory 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 came to light 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.

Fee Overcharging Hits Multiple Client Types

The SFC said Deutsche Bank "failed to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market" in its disciplinary statement.

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. This error alone cost clients approximately $5 million.

The overcharging happened due to what the SFC described as "shortcomings in DB's processes and failures in their implementation." 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.

Deutsche Bank also incorrectly valued 392 floating-rate debt instruments by treating them as fixed-rate bonds between November 2015 and December 2020. This led to wrong portfolio valuations and resulted in 92 clients being overcharged €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. An outsourced vendor responsible for updating fund prices stopped doing so due to IT issues but failed to properly escalate the problem. This resulted in 233 clients receiving incorrect monthly statements and 32 of them being overcharged $493 in custodian fees.

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Research Disclosure Failures Span Seven Years

Deutsche Bank's research division failed to disclose investment banking relationships in 261 single-company reports and 1,590 industry reports published between September 2014 and September 2021. The bank's global research disclosure system missed relationships where mandates existed but fees hadn't been received yet, or where mandates weren't properly marked as closed in client systems.

The bank also assigned incorrect product risk ratings to 40 exchange-traded funds between August 2012 and December 2020, affecting 265 transactions involving 93 clients. Ten transactions resulted in risk mismatches where products carried higher risk than clients' stated tolerance levels. The errors stemmed from outdated guidelines and knowledge gaps among operations staff due to turnover.

This is not the first time the SFC has dealt with Deutsche Bank. Nearly 10 years ago, it banned one of the bank’s Korean employees for involvement in market manipulation. In 2021, a former Deutsche Bank trader was sentenced to prison for fraud.

Regulatory Response Considers Cooperation

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 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 fine of a similar size to Germany’s BaFin for regulatory breaches. However, this is far from the record penalties the bank has grown accustomed to. One example is the $775 million fine from the U.S. Department of Justice for Libor rigging.