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SFC fines UBS for Overcharging Clients and related Internal Control Failures

  • Nov 14, 2019

The Securities and Futures Commission has issued a fine of HKD400 million to UBS AG for overcharging its clients for a decade, with the bank receiving official reprimand for its actions, as well as for related serious systemic internal control failures.

The Securities and Futures Commission (SFC) has stated in a media release that UBS has failed to observe the fundamental and overarching duty to act in its clients’ best interests, abusing the trust of “unsuspecting clients” due to a lack of transparency in trades, and through its failure to disclose Conflicts of Interest.

UBS has undertaken action to compensate clients that have been affected by instances of overcharging, with the bank repaying the full amount that has been overcharged with interest, totalling an approximate value of HKD200 million.

The payment sum covers overcharges made through post-trade spread increases and charges in excess of standard disclosures or rates between 2008 and 2017; the practises have been reported by the SFC to have affected around about 5,000 Hong Kong-managed client accounts across 28,700 transactions.

The SFC’s Chief Executive Officer, Ashley Alder, has stated that “The SFC expects all intermediaries to uphold high standards of integrity when managing trades for clients. UBS fell far short of these expectations by systematically overcharging a very large number of clients over many years.

“Although each overcharge represented a fraction of each trade, UBS’s misconduct involved deception and a pervasive abuse of trust resulting in significant additional revenue for UBS to which it was not entitled,” Adler continued.

Investigations by the SFC have revealed that, between 2008 and 2015, client advisors and client advisors’ assistants working within UBS’s Wealth Management division had overcharged clients when conducting bond and structured note trades. This was accomplished by increasing the spread charged after the execution of trades without clients’ knowledge.

In addition, investigations found that during the same timeframe, UBS had also charged its clients fees in excess of its standard disclosures or rates.

The SFC has reported that in instances in which the actual execution price achieved in the market, following the execution of a client’s request to buy or sell products, was better than the limit order price, UBS client advisors would increase the spread after executing the trades in order to retain the price improvement for UBS without agreement with, or disclosure to, the clients.

Instances in which client advisors falsified the account statements issued to financial intermediaries have also been reported, with client advisors being found to have misreported the spread amount to conceal the overcharges.

The SFC has found that UBS failed to properly disclose the capacity in which it acted for its clients when conducting secondary market bond and structured note trades and failed to report its spread overcharge practices to the SFC until two years after the identification of the misconduct.

UBS’ capability to put in place effective remediation to address the spread overcharge practices and proper internal controls to avoid the recurrence of historical deficiencies, as UBS has reported 15 incidents to the SFC or the Hong Kong Monetary Authority relating to the failures of One Wealth Management Platform (1WMP), which was first implemented in 2017, instead of putting in place a system that ensures its compliance with relevant regulatory requirements.

The SFC has deemed that UBS has failed to act honestly, fairly and in the best interests of its clients; act with due skill, care and diligence, in the best interests of its clients; avoid conflicts of interest; provide adequate disclosure of relevant material information to clients; and comply with all relevant regulatory requirements applicable to the conduct of its business activities.

This conclusion by the SFC has led to the issuance of the reprimand and fine, with the SFC having taken into consideration the elements of dishonesty, the duration of UBS’s spread overcharge practices, the undetected nature of the offences and the systemic nature of UBS’s internal control failures.

However, the SFC has stated that it has acknowledged UBS’s disciplinary actions against over 20 staff who had engaged in the malpractice and the bank’s agreement to fully compensate the affected clients.

UBS has also agreed to appoint independent reviewers to identify the root causes of the spread overcharge practices, assess the magnitude of the malpractice, validate the relevant overcharge and compensation arising from 1WMP, as well as to review the adequacy and effectiveness of the bank’s remediation measures.

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