The Financial Services Authority (FSA) has fined UBS AG (UBS) for failures in the sale of the AIG Enhanced Variable Rate Fund (the Fund). These failures led to UBS customers being exposed to an unacceptable risk of an unsuitable sale of the Fund. UBS also failed to deal properly with complaints from customers about sales of the Fund.
Between 1 December 2003 and 15 September 2008 UBS sold the Fund to 1,998 high net worth customers, with initial investments totalling approximately £3.5 billion. The Fund invested in financial and money market instruments but, unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of the Fund’s assets in asset backed securities and floating rate notes.
During the financial crisis of 2007 and 2008, the market values of some of the assets in the Fund fell below their book values. On 15 September 2008, Lehman Brothers applied for Chapter 11 bankruptcy protection in the US and AIG's share price then fell sharply and suddenly. 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 with customers prevented from immediately withdrawing all of their investment. At that point 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 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 six had been upheld by UBS). UBS has agreed to conduct a redress programme for those customers who remained invested in the Fund at the time of its suspension. It is estimated that compensation payable to customers will be around £10 million.
UBS’s failings were serious and included:
♦ Failing to carry out adequate due diligence on the Fund before selling it to customers, so UBS had an inadequate understanding of the nature of the Fund’s assets and the consequent risks. In addition, UBS failed to ensure its advisers were provided with appropriate training about the Fund so could not correctly determine its suitability for customers;
♦ Advisers recommending the Fund to some customers even though it did not provide the level of capital security that they apparently sought. Customers were not sent suitability reports when UBS sold the Fund, so customers were not given a record of why the Fund was suitable for them;
♦ Indicating to customers that the Fund was a cash fund that invested in money market instruments. Instead a significant proportion of the Fund was invested in other assets;
♦ Failing to respond appropriately during the 2007-08 financial crisis when UBS had concerns about the Fund and also realised that there was a greater risk of the Fund suspending redemptions and of customers suffering a loss. Although UBS took steps to improve its knowledge of the Fund, it did not take appropriate action to address its concerns and the way it sold the Fund. UBS did not review past sales to ensure that they were suitable, nor did it ensure that its advisers provided a fair and accurate explanation of the risks when reassuring existing customers;
♦ Failing to assess customer complaints relating to sales of the Fund fairly, despite conducting a thorough investigation of those complaints; and
♦ Not maintaining adequate sales records, including a record of whether a customer was sold the Fund on an advised, discretionary or non-advised basis.
As a result of these failings, UBS breached FSA Principle 9 (ensuring the suitability of its advice) and Principle 6 (treating customers fairly).
Tracey McDermott, director of enforcement and financial crime, said:
“Firms such as UBS should be under no illusion about the standards expected of them. UBS’s conduct fell far short of what its customers deserved and what the FSA requires. It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the Fund came to the fore.
“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.”
UBS agreed to settle at an early stage entitling it to a 30% discount on its fine. Were it not for this discount, the FSA would have imposed a financial penalty of £13.5 million on UBS.
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