FSA Fines UBS £29.7m for Systems and Controls Failings over Adoboli
The UK’s Financial Services Authority (FSA) has fined Swiss bank UBS (UBS) £29.7m, discounted from an earlier figure of £42.4m million for early settlement, for systems and controls failings that allowed rogue trader Kweki Adoboli to cause substantial losses totalling US$2.3 billion as a result of unauthorised trading.
Adoboli was convicted
of two counts of fraud by abuse of position and sentenced to seven years’ imprisonment earlier this month The FSA said that UBS’ systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls.
Its investigation revealed that on 14 September 2011 UBS became aware that unauthorised trading had been carried out between 1 June and 14 September 2011 that year on the Exchange Traded Funds (ETFs) desk in the Global Synthetic Equities (GSE) trading division conducted from UBS’s London branch.
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.
Over the 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 concludes 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.
“UBS’s systems and controls were seriously defective,” said Tracey McDermott, the FSA’s director of enforcement and financial crime. “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.”
UBS agreed to engage an independent firm to conduct a substantive investigation into the unauthorised trading incident, expending resources of around £16m to date in the process, while the bank’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 £34m. More pertinently, UBS has exited fixed trading completely as part of
group-wide cut backs