HSBC’s Luxembourg unit must compensate investors hit by the Bernard Madoff scandal only if a local court finds the bank breached its custodial duties over a dissolved fund that placed assets with Mr Madoff, the country’s financial regulator said.

“In accordance with general principles of Luxembourg law, the CSSF, in its capacity as public supervisory authority, has therefore taken all necessary administrative measures with regard to the supervised entities concerned and their respective directors. However, the final decision regarding contractual liability between private parties can only be taken conclusively by a competent Luxembourg court,” the Commission de Surveillance du Secteur Financier said in a statement.

“Hence, in accordance with the principle of separation of powers, the competence of deciding on the civil liability of an entity towards individual investors (including tort, damage suffered and their causal link) lies exclusively within the power of the judiciary and therefore of the courts with civil and commercial jurisdiction,” it said.

Banks providing custodial services are under scrutiny by regulatory authorities in the wake of the $65 billion Madoff scandal. Dozens of wealth management firms, hedge funds, banks and private individuals have been hit by his Ponzi scheme fraud.

“HSBC believes that it has complied with all its obligations as the depositary bank of the Herald Lux SICAV and agrees with the commission that it is exclusively up to the civil courts to determine the outcome of this matter,” the London-based bank said in an e-mailed statement yesterday, according to Bloomberg.