UBS AG has received another fine from the FSA. The fine is a result of (i) failures in the sale of the AIG Enhanced Variable Rate Fund (which led to customers being exposed to an unacceptable risk of an unsuitable sale of the Fund between December 2003 and September 2008) and (ii) failures to deal properly with related client complaints. After taking account of the discount for early settlement, UBS was fined £9.45m.
The Fund was sold to high net worth customers and was invested in financial and money market instruments. However, unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of its assets in floating rate notes and securities that were primarily backed by UK residential and commercial mortgages with exposure at certain times to non-conforming UK residential mortgages. Despite this, UBS classified the Fund as a low risk product; and deemed it to be potentially suitable for all its customers regardless of their tolerance for risk.
During the financial crisis, the market value of some of the assets in the Fund fell below their book value and, immediately following the collapse of Lehman Brothers, AIG's share price fell sharply. A large number of investors sought to withdraw their investments and there was a run on the Fund. As a result, the Fund was suspended and customers were prevented from immediately withdrawing all of their investment. At that point in time, 565 UBS customers had approximately £816 million invested in the Fund.
A sample review by the FSA of sales of the Fund to 33 customers found that 19 were mis-sold and that there was a considerable risk that 12 of the remaining 14 may have been mis-sold. The FSA also reviewed 11 complaints made by these customers and found that all 11 had been assessed unfairly - albeit that the complaints had been thoroughly investigated and six had been upheld by UBS.
As a result, UBS breached Principle 9 (ensuring the suitability of its advice) and Principle 6 (treating customers fairly).
UBS’s failings were serious and included the following:-
- Failing to carry out adequate due diligence on the Fund before selling it to customers, such that UBS had an inadequate understanding of the nature of the Fund’s assets and its risks.
- Failing to ensure its advisers were provided with appropriate training about the Fund in order correctly to determine its suitability for customers. One adviser said he "wasn't clear himself what was actually in [the Fund]".
- Indicating to customers that the Fund was a cash fund that invested in money market instruments.
- Customers were not sent suitability reports when UBS sold the Fund and it failed to review past sales to ensure they were suitable.
- Failing to assess customer complaints relating to sales of the Fund fairly, despite conducting a thorough investigation of those complaints. For example, UBS employed a narrow complaints handling methodology.
The FSA's credible deterrence agenda is well known. As part of that, the FSA has had a particular focus on suitability and on the wealth management industry. (See for example Enforcement Watch 3: “The FSA sends a tough message on suitability” and Enforcement Watch 5: “Dear CEO letter to wealth managers suggests action to come”).
This latest UBS fine represents another example of the approach that the FSA is taking to such issues. Indeed, Tracey McDermott, director of enforcement and financial crime, trumpeted the Final Notice with the words "We have made our expectations in relation to the wealth management industry clear. UBS has paid the price for its failures and we will continue to take strong action against firms who fail to do the right thing for their customers."
Although the fine is substantial, the precise way in which it was determined remains unclear as the facts of this case occurred before the implementation of the FSA's new penalty setting regime in March 2010 which is in some respects more transparent (see Enforcement Watch 1: "Harsher Penalty Setting Introduced"). UBS received a 30% discount on the headline financial penalty figure of £13.5m for early settlement.
The fine is only part of the financial consequence for UBS. UBS agreed to conduct a redress programme in relation to customers who remained invested at the time of the Fund's suspension in September 2008. It is estimated that compensation will be in the region of £10 million.
The case is not the first in relation to the Fund in question. On 7 November 2011, the FSA fined Coutts £6.3m for failings relating to the sale of the AIG Fund (see Enforcement Watch 6 “Coutts fined £6.3m for AIG Fund sales failings”).