Respected fund manager Neil Woodford made headlines earlier this year after revealing that he had bought in to HSBC (LSE: HSBA) (NYSE: HSBC.US). For Woodford, this was a change of heart as the City guru has long been a critic of the banking sector. The quality of loan books, capital adequacy and high leverage ratios were all reasons that convinced him to steer clear.
Nevertheless, after much deliberation Woodford began buying HSBC during 2013. Woodford believed that HSBC had become “a very different beast” under the stewardship of current CEO Stuart Gulliver. Â 
Woodford’s change of heart regarding HSBC was a surprise, but it was even more of a surprise when Woodford revealed that he had sold his HSBC holding after only a year.
This sudden U-turn was influenced by the fact that regulators continue to levy fines on banks for mistakes made in the run-up to the financial crisis. A substantial fine could hamper HSBC’s ability to grow its dividend.
As it turns out, Woodford was right, HSBC is still being asked to pay hefty fines, the most recent of which is a $550m fine related to mortgage mis-selling.
Out-of-court settlement Â
Last week, HSBC paid $550m to settle a mortgage mis-selling suit within the US. The settlement was made with the Federal Housing Finance Agency (FHFA), the regulator of the two government-controlled finance companies, Fannie Mae and Freddie Mac. HSBC was accused of misleading Fannie and Freddie regarding loans underlying $6.2bn of mortgage-backed securities sold from 2005 to 2007. HSBC continues to deny any wrongdoing.Â
Luckily, this settlement deal comes three weeks before a trial relating to the case was due to begin in New York, where HSBC could have faced $1.6bn in damages.Â
But while HSBC has made a lucky escape, Barclays (LSE: BARC) (NYSE: BCS.US) is facing an ever increasing pile of legal issues.Â
Rising costs
Having already set aside more than £1.2bn for legal costs during the second quarter of this year, City analysts believe that Barclays could be facing a further £1.2bn legal liability during the second half. These costs are related to the investigation regarding its “dark pool” trading platform.
Further, analysts expect that Barclays will be forced to take a £300m charge during the second half of the year, to compensate customers who were mis-sold products to help them hedge interest rates. Unfortunately, these are just two of the pressing legal issues facing Barclays.
Indeed, the bank is still facing costs from other legacy issues and some estimates have put Barclays’ potential legal bill over the next few years at around £7bn, although this is a worst-case scenario.
A pressing issue
Rising legal costs and fines are a pressing issue for the banking sector as a whole. However, I strongly recommend that you do your own research before making any trading decision.