The FSA has fined UBS AG £29.7m (after applying a 30% early settlement discount) for systems and control failures that allowed one of its traders, Kweku Adoboli, to cause and disguise unauthorised trading losses totalling US$2.3bn.
Adoboli, who was a relatively junior trader, disguised the losses by making use of late bookings of real trades, booking fictitious trades to internal accounts and using fictitious deferred settlement trades. He has separately been sentenced to seven years’ imprisonment following his trial at Southwark Crown Court. In the FSA’s Final Notice relating to UBS, the firm is criticised for not focussing sufficiently on the key risks associated with unauthorised trading. Significant control breakdowns allowed Adoboli’s rogue trading to remain undetected for an extended period of time – between June and September 2011.
UBS breached both Principle 2 (due skill, care and diligence) and Principle 3 (risk management systems and controls). For example, its computerised risk management system was ineffective, and there was insufficient challenge and supervision of the front desk of its Global Synthetic Equities business based in London. UBS staff focussed on facilitation and efficiency, rather than on controlling risk. Risk was not actively discouraged. Indeed, middle office staff aspired to roles in the front office, which may have generated behaviours aligned to the front office’s interests rather than practices required to exercise effective control.
In a nutshell, UBS’s systems and controls were seriously defective. This allowed Adoboli to take vast and risky market positions that resulted in massive losses and UBS failed to manage the risks around that properly.
Clearly, in some ways, the fact that there is fallout for UBS from the Adoboli affair is not surprising. However, there still remain certain areas of interest that are worth noting.
One such area is a particular emphasis that appears in the FSA press release. The FSA highlights the risk to market confidence caused by sudden negative announcements to the market such as the one that resulted from this case.
How the fine was arrived at is also noteworthy. The level of fine was fixed by reference to the annual revenue of the relevant trading division at the firm, Global Synthetic Equities (see in this context the relevant penalty setting regime referred to in Enforcement Watch 1 "Harsher Penalty Setting Introduced"). Having decided to fix the fine by reference to the relevant revenue, the next consideration under Step 3 of the process is the relevant percentage to apply in order to reflect the seriousness. In this case, it was bound to be one of the two most serious levels (Level 4 or Level 5). The FSA plumped for the lesser Level 4 (15%), but there is no discussion about why the FSA selected Level 4 rather than Level 5 (20%). Also of note is that, in assessing both the aggravating factors and the mitigating factors, the FSA elected not to apply any adjustment to the Level 4 figure produced. The fact that UBS promptly brought the matter to the attention of the authorities and also spent approximately £16m up to the date of the Final Notice in conducting a substantive investigation into the incident may well have weighed heavily.
One of the aggravating factors cited was the fact that UBS was earlier (in November 2009) fined £8m for systems and controls failings in its international wealth management business. This is an indication that the FSA expects lessons learned in one business area of a firm’s operation to be applied in the firm’s other business areas.