FSA Settles a Market Crisis Case with UBS
The UK Financial Services Authority announced a settled market crisis action in which UBS was fined £9.45 million for exposing sophisticated investors to unacceptable investment risk.
From December 2003 through September 2008 the firm sold shares in the AIG Enhanced Variable Rate Fund to 1,998 investors. All were high net worth individuals. The investments totaled £3.5 million. The investments were in a money market fund. Unlike most money market funds however, this fund focused on delivering enhanced returns. It sought to do this by investing a significant portion of its assets in mortgaged backed securities and floating rate notes.
As the market crisis unfolded, the value of some of the assets in the fund dropped below book value. Following the collapse of Lehman Brothers in September 2008 the share price dropped significantly. There was a run on the fund. Redemptions were halted and many investors could not recover their funds.
UBS failed to ensure the suitability of its advise, the regulator concluded. This is evidenced by the fact that:
• The firm failed to carry out adequate due diligence before marketing the shares to investors;
• The firm failed to provide adequate training to its sales force to ensure that the shares were only sold to suitable customers;
• Its advisers recommended the fund to customers despite the fact that it did not provide the sought after level of security;
• Customers were not furnished with a report about the reason the fund was suitable for them;
• The firm told some customers it was a cash fund when in fact a large portion of its assets were invested in high risk instruments;
• The firm failed to respond appropriately to its growing concerns about the fund and its realization of the risk;
• The firm failed to assess customer complaint fairly; and
• It did not maintain adequate sales records.
UBS has agreed to implement a remediation program. Since UBS agreed to settle at an early stage it was given a 30% reduction in the fine which otherwise would have been £13.5 million.