Swiss bank UBS will pay $59 million in total civil penalties in resolutions with both Hong Kong and Swiss regulators for overcharging clients for over a decade. For chief compliance officers and chief risk officers, it’s a cautionary tale about the potential consequences of systemic compliance and internal control failures.
In the first action, Hong Kong’s Securities and Futures Commission (SFC) fined UBS HK$400 million (U.S. $51 million) for overcharging clients for over a decade and for related “serious systemic internal control failures,” including inadequate policies, procedures and system controls; lack of staff training and supervision; and failures of the first and second lines of defense functions of UBS, the SFC said. The overcharge practices affected about 5,000 Hong Kong-managed client accounts in about 28,700 transactions.
The SFC also found that UBS failed to:
- Understand and properly disclose the capacity in which it acted for its clients when conducting secondary market bond and structured note trades;
- Report its overcharge practices to the SFC until two years after the misconduct was identified; and
- Ensure compliance with relevant regulatory requirements.
“These issues call into question UBS’s capability to put in place effective remediation to address the spread overcharge practices and proper internal controls to avoid the recurrence of historical deficiencies,” the SFC said. In deciding disciplinary sanctions, the SFC said it considered all relevant circumstances, including elements of dishonesty, the duration of UBS’s spread overcharge practices and that they went undetected for at least seven years; and the serious and systemic nature of UBS’s internal control failures.
UBS did, however, take disciplinary actions against over 20 staff who had engaged in the malpractice, the SFC said. The bank further appointed independent reviewers to identify the root causes of the overcharge practices and review the adequacy and effectiveness of UBS’s remediation measures. The SFC said it also considered UBS’s agreement to fully compensate the affected clients.
Deceptive trade charges
On Nov. 14, UBS also agreed to a civil penalty of $11.2 million Singapore dollars (U.S. $8.2 million) imposed by the Monetary Authority of Singapore (MAS) for engaging in acts “that deceived, or were likely to deceive, clients about the spreads and/or interbank prices for transactions in over-the-counter (OTC) bonds and structured products,” MAS said. The enforcement action followed UBS’s self-reporting of the misconduct.
The investigation showed that in numerous transactions, client advisors either did not adhere to the spread or interbank price of a trade as agreed with or understood by the client; failed to disclose or made only partial disclosure to the client when there was a price improvement in the interbank price of a limit order; and/or overcharged the clients in excess of the fees set out in the bank’s fee disclosure documents to clients.
In 2018, MAS inspected the bank’s efforts in remediating the internal control weaknesses that led to the violations. “We note that the bank has taken measures to address system and control deficiencies to prevent arbitrary spread increases and enhance price disclosures to clients,” MAS said, noting that it has asked UBS to appoint an independent party to validate the adequacy and effectiveness of the bank’s remediation measures. UBS is required to report the reviewer’s findings to MAS.
UBS has undertaken to compensate all affected clients managed by UBS’s Singapore branch for misconduct during the period from 2008-2017. Investigations by MAS into the individuals involved in the misconduct are ongoing.