Readers may recall that UBS was recently fined £29.7 million by the FSA for breaches of principles 2 and 3 of the FSA’s Principles for Businesses following the conviction of its former employee Mr Kweku Adoboli for fraud by abuse of position. Today the FSA has issued a further, albeit unrelated, Final Notice against UBS and has fined the company £160 million; the largest fine ever imposed by the FSA.

This new fine is in respect of misconduct relating to the London Interbank Offered Rate (“LIBOR”) and is the second fine issued by the FSA in respect of LIBOR; the first being a fine of £59.5 million issued against Barclays Bank back in June of this year.

The Wall Street Journal is reporting that this fine forms part of a larger settlement which UBS has reached not only with the FSA but also with the Swiss Financial Market Supervisory Authority, the US Justice Department and Commodity Futures Trading Commission.

UBS must pay the FSA fine by 2nd January 2013.

What is LIBOR?

LIBOR is published on behalf of the British Bankers’ Association (the “BBA”) for ten different currencies. It is set by reference to the assessment of the interbank market made by panel banks which have been selected by the BBA. The panel banks submit rate submissions each business day based on their subjective assessment of the rates at which money may be available in the interbank market.

LIBOR is a benchmark rate which is fundamental to the operation of both UK and international financial markets. It is the most frequently used benchmark for interest rates globally and is referenced in transactions with a notional value of at least USD 500 trillion.

What did UBS do?

UBS was a panel bank for a number of LIBOR currencies, including GBP, EUR, JPY and USD.

The FSA identified at least 2,000 documented incidents of requests for inappropriate submissions of LIBOR rates, made by traders at UBS between 1st January 2005 and 31st December 2010 to individuals responsible for determining UBS’s LIBOR submissions and also to individuals at other panel banks in an attempt to get them to make submissions which benefited UBS’s trading position. There were also an unquantifiable number of oral requests aimed at manipulating the LIBOR rate. A great deal of the manipulation was in respect of the JPY LIBOR submissions made by UBS and other panel banks.

Evidence of open collusion, widely known within the bank, was found and at least 45 individuals including traders, managers and senior managers at UBS were involved or aware of the attempts to manipulate the LIBOR rate.

The FSA accepts that the bank itself did not engage in deliberate misconduct, however, the systems and controls in place at the bank were identified as being weak and failed to prevent “the deliberate, reckless and frequently blatant actions of its employees”.

All FSA regulated firms are required to comply with the Principles for Businesses which are set out in the FSA Handbook. These principles reflect the FSA’s regulatory objectives and are a general statement of the obligations which firms have under the regulatory system currently in place. UBS was found to have breached:

  • Principle 3 which states that “firms must take reasonable care to organise and control its affairs responsibility and effectively with adequate risk management systems”; and
  • Principle 5 which requires firms to observe proper standards of market conduct.

The FSA has not quantified the net benefit gained by UBS as a result of the misconduct of its employees however, it is clear that substantial sums were at stake. The manipulation of LIBOR was aimed at improving the profitability of trading positions at UBS and this was taken into account when determining the appropriate fine.

The FSA’s position

The FSA acknowledges that the manipulation of LIBOR is likely to have had only a minimal direct impact on UK retail consumers; however, it continues to pursue a number of other cross border investigations in relation to LIBOR. Tracey McDermott, the FSA director of enforcement and financial crime, said that:

“the integrity of benchmarks such as LIBOR….are of fundamental importance to both UK and international markets. UBS traders and managers ignored this. They manipulated UBS’s submissions in order to benefit their own positions…..showing a total disregard for the millions of market participants around the world who were also affected by LIBOR….There should be no doubt about how seriously the FSA views these failings. This is our largest penalty to date and demonstrates our commitment to ensuring that those in the wholesale markets do not put their own interests above those of the market as a whole.”

The fine issued today would have been £200 million, however, UBS agreed to settle at an early stage of the FSA investigation and as such qualified for a 20% discount pursuant to the FSA’s executive settlement procedures.

UBS is one of the biggest, most sophisticated and well resourced financial institutions in the UK. The FSA considers the action of UBS’s employees to amount to serious breaches and as such warranted the highest penalty possible.

The FSA clearly wants to send a loud and clear message, not only to UK financial institutions but also to the global financial market, that actions such as these, which undermine confidence in the UK and/or global financial market, will not be tolerated here in the UK and those engaged in such activity will feel the full force of the UK regulatory system.