The Financial Services Authority (FSA) has fined UBS AG (UBS) £29.7 million (discounted from £42.4 million for early settlement) for systems and controls failings that allowed an employee to cause substantial losses totalling US$2.3 billion as a result of unauthorised trading. The trader, Kweku Adoboli, has been convicted of two counts of fraud by abuse of position and sentenced to seven years’ imprisonment. The systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls.
On 14 September 2011 UBS became aware that unauthorised trading had been carried out between 1 June 2011 and 14 September 2011 (the Relevant Period) on the Exchange Traded Funds Desk (the Desk) in the Global Synthetic Equities (GSE) trading division conducted from the London Branch of UBS.
The losses were incurred primarily on exchange traded index future positions. The underlying positions were disguised by the use of late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades.
During the Relevant Period, there was insufficient focus on the key risks associated with unauthorised trading within the GSE business conducted from the London Branch. The significant control breakdowns allowed the trading to remain undetected for an extended period of time.
The FSA believes that UBS failed to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and failed to conduct its business from the London Branch with due skill, care and diligence.
In particular UBS' failings included:
- The computerised system operated by UBS to assist in risk management was not effective in controlling the risk of unauthorised trading.
- The trade capture and processing system had significant deficiencies, which Adoboli exploited in order to conceal his unauthorised trading. The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems.
- There was an understanding amongst personnel supporting the Desk that the Operations Division's main role was that of facilitation. Their main focus was on efficiency as opposed to risk control and they did not adequately challenge the Front Office.
- There was inadequate front office supervision. The supervision arrangements within GSE were poorly executed and ineffective.
- The Desk breached the risk limits set for their desk without being disciplined for doing so. These limits represented a key control and defined the maximum level of risk that the Desk could enter into at a given time. This created a situation in which risk taking was not actively discouraged or penalised by those with supervisory responsibility.
- Failing to investigate the underlying reasons for the substantial increase in profitability of the Desk despite the fact that this could not be explained by reference to the end of day risk positions.
- Profit and loss suspensions to the value of $1.6 billion were requested by Adoboli during the course of August 2011. Prior to 18 August 2011, these were accepted without challenge or escalation. The combined factors of unexplained profitability and loss suspensions should have indicated the need for greater scrutiny.
- These failings are particularly serious because:
- Market confidence was put at risk, given the sudden announcement to the market and size of the losses announced. Negative announcements, such as this, put at risk the confidence which investors have in financial markets.
- The systems and controls failings revealed serious weaknesses in the firm's procedures, management systems and internal controls.
- The failings enabled Adoboli to commit financial crime.
Tracey McDermott, director of enforcement and financial crime, said:
"UBS's systems and controls were seriously defective. UBS failed to question the increasing revenue of the desk and failed to ensure that there was a corresponding increase in the controls in place over the desk. As a result Adoboli, a relatively junior trader, was allowed to take vast and risky market positions, and UBS failed to manage the risks around that properly. We know from past experience that failures to manage risk properly can cause firms to fail and cause systemic harm.
"Failures of this type in firms of the size and standing of UBS not only damage the firms concerned but also wider confidence in the integrity of the markets and the financial system. It is imperative that the markets we regulate are seen by investors to be orderly and a safe place to do business.
"This penalty - fixed at 15% of the revenue of the GSE trading division - is intended to make it clear that the FSA expects much higher standards from the firms we regulate."
In setting the level of the penalty, the FSA took into account the revenue generated by the business area where the poor controls occurred.
It also took into account the fact that in November 2009 UBS was fined £8 million for failings in relation to the systems and controls around the international wealth management business conducted with non-UK resident clients in the London branch of UBS. The FSA expects firms to consider whether the issues identified in an enforcement action are applicable to other business areas and whether remedial action is necessary, UBS failed to do this.
UBS agreed to settle at an early stage and therefore qualified for a 30% discount under the FSA's executive settlement procedures. Were it not for this discount, the fine would have been £42.4 million.
UBS agreed to engage an independent firm to conduct a substantive investigation into the unauthorised trading incident, expending considerable resources (approximately £16 million to date) in doing so. UBS's new senior management has committed significant resources to undertake an extensive programme of remediation.
UBS has taken disciplinary action against employees who were involved in the events which gave rise to these breaches, including clawing back bonuses and withholding 50% of their deferred compensation from relevant individuals totalling more than £34 million.
The FSA conducted its investigation in coordination with the Swiss Financial Market Supervisory Authority (FINMA) which has also made its findings public. FINMA has also taken action against UBS in relation to the breach which is the subject of this Notice and UBS has undertaken to comply with the separate requirements imposed on it by FINMA.
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