Mis-Selling and Risk Failings: FSA Fines UBS Over Asset Backed Securities Fund

The Financial Services Authority slapped UBS with a fine following the mis-selling and a series of failings in a fund sale that left nearly 2,000 investors exposed to the type of financial instruments that brought on the global credit crisis.

The FSA issued UBS with a £9.45m (€11m/$15m) fine for a series of failings in the sale of the AIG Enhanced Variable Rate Fund, which led to 1,998 high net worth customers being "exposed to an unacceptable risk" and a high proportion being mis-sold the product, says the regulator in a statement on its website.

Since UBS agreed to settle at an early stage, a 30 percent discount was applied to the fine, but were it not for this discount the FSA would have imposed a financial penalty of £13.5m.

Switzerland's largest bank has also agreed to conduct a redress programme for those customers who remained invested in the Fund at the time of its suspension and it is estimated that compensation payable to customers will be around £10m.

The FSA also added that UBS failed to deal properly with complaints from customers about sales of the Fund, which invested in financial and money market instruments, between 1 December 2003 and 15 September 2008.

However, the UK watchdog said that unlike a standard money market fund, UBS' AIG fund sought to deliver an enhanced return by investing a material proportion of the Fund's assets in asset backed securities (ABS) and floating rate notes.

ABS is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities and was largely to blame for credit crisis of of 2007 and 2008.

During the financial crisis, the market values of some of the assets in the Fund fell below their book values and were further exacerbated when Lehman Brothers applied for Chapter 11 bankruptcy protection in the US on 15 September 2008.

At this time, AIG's share price then fell sharply and suddenly and 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 and at that point 565 UBS customers had approximately £816m invested in the Fund.

"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," says Tracey McDermott, director of enforcement and financial crime at the FSA in a statement.

"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," she adds.

Out of the near 2,000 customers, 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 had been assessed unfairly, albeit that six had been upheld by UBS.

The FSA added that other "UBS' failures were serious and included failing to carry out adequate due diligence on the Fund before selling it to customers, failing to respond appropriately during the 2007-08 financial crisis, not maintaining adequate sales records and advisers recommending the Fund to some customers even though it did not provide the level of capital security that they apparently sought."