Hong Kong regulator fines UBS $1.5M for compliance failings

UBS AG and UBS Securities Asia Limited (UBSSAL) were penalized HK$9.8 million and HK$1.75 million, respectively. The Securities and Futures Commission’s (SFC) investigation found between May 2004 and May 2018, UBS failed to make proper disclosure of its financial interests in some Hong Kong-listed companies covered in its research reports.

UBS self-reported the violations to the regulator.

According to the SFC’s statement of disciplinary action, the failure was caused by “(i) multiple data feed logic errors in relation to a legacy data source used by UBS for tracking its shareholding positions, and (ii) UBS’s lack of proper systems and controls to test the accuracy of, and detect the logic errors in, the data feeds.”

These lapses allegedly affected 80 research reports (6.43 percent) issued by UBSSAL and 125 research reports (14.59 percent) issued by UBS AG during sample periods between September 2017 and May 2018.

Among other compliance failures identified by the SFC, UBS failed to diligently supervise its client advisors and implement sufficient controls to ensure only professional investor clients subscribed to the securities pooled lending service. The bank also allegedly failed to record client order instructions received through the telephone between August 2017 and June 2019.

In another example, UBS neglected to disclose to clients the “stop loss event” feature of a structured note issued by an issuer before trade execution. This affected the sale of 12 notes at a value of about $12 million.

The SFC also described that, prior to 2018, UBS required its staff to obtain trading evidence, such as bank statements, from clients who declared they had conducted at least five derivative trades in the past three years. The bank discontinued this practice because of misinterpretation of SFC guidance. As a result, between January 2018 and June 2020, UBS “failed to follow applicable regulatory guidelines relating to the assessment of clients’ derivatives knowledge by failing to obtain trading evidence from 858 clients who declared that they had conducted five or more derivative trades in the past three years.”

Remedial measures: In deciding the sanction, the SFC considered all relevant circumstances, including UBS’s remedial actions to strengthen its internal controls and systems upon identifying the breaches; the bank’s offer to compensate clients affected by its failure to disclose the stop loss event feature of structured notes; UBS’s agreement to engage an independent reviewer to evaluate the effectiveness and adequacy of its remedial measures taken in relation to its telephone recording failures; and the bank’s cooperation.