Two fines for UBS

Chris Hamblin

18 November 2019

The two regulators levied their fines within three days of each other. On 11 November came the Hong Kong fine, with the SFC alleging that the Swiss wealth management giant not only failed to observe the fundamental and overarching duty to act in its clients’ best interests but also abused the trust of unsuspecting clients by failing to tell them about conflicts of interest and by overcharging them in opaque trades.

The statement of disciplinary action reads: "Between 2008 and 2017, UBS overcharged its clients by increasing the spread after execution of trades without their knowledge and charging them fees in excess of standard disclosures or rates. The overcharge amounted to approximately HK$180 million, affecting about Hong Kong-managed 5,000 client accounts in about 28,700 transactions."

Between 2008 and 2015, it was a widespread practice for the client advisors (CAs) and client advisors’ assistants (CAAs) in UBS’s wealth management division to increase the spread charged to clients after the execution of a trade (post-trade spread increase or PTSI) in bonds and structured notes. The details are as follows.

UBS was not good enough at divulging the execution price and charges that it was making in bond and structured note trades to its clients during that period.
In circumstances where the execution price achieved in the market was better than the limit order price placed by the client in buy or sell trades (price improvement), the CAs and CAAs used to increase the spread within UBS’s Client Order Processing System (COPS) after the execution of trades for clients in order to retain the price improvement for UBS without extracting the clients' agreement, or even telling them about it.
On some occasions, the CAs and CAAs misreported the execution price or spread to the clients.
In some other cases, the CAs and CAAs falsified quarterly statements issued to financial intermediaries who were authorised to trade for clients by misreporting the spread amount to conceal the overcharges.

In Hong Kong UBS is registered under the Securities and Futures Ordinance to do business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities.

The SFC says that UBS failed to:

act with due skill, care and diligence and in the best interests of its clients in accordance with General Principle 2 and paragraph 3.10 of its code of conduct;
give its clients enough information in accordance with General Principle 5;
avoid conflicts of interest with clients and treat them fairly in accordance with General Principle 6 and paragraph 10.1 of the code;
ensure that any representations made and information provided to the client are accurate and not misleading - see paragraph 2.1 of the code;
ensure that the provision of the charges, mark-ups, or fees affecting a client should be fair, reasonable and characterised by good faith in accordance with paragraph 2.2 of the code;
execute clients' orders on the best available terms when acting for them - see paragraph 3.2 of the code; and
give the client adequate information about the services provided to the client including the nature and scope of fees, penalties and other charges that UBS might have levied on them - see paragraph (1)(c) of the Appendix to the Internal Control Guidelines.

In Singapore, where US$1 = S$1.36, UBS has admitted liability for its client advisors' actions, paid the regulator the civil penalty and promised to compensate all affected clients of its Singapore branch. When UBS executed over-the-counter (OTC) transactions requested by its clients, it did so with interbank counterparties, and its practice was to charge a spread over the interbank price that it obtained from the counterparty. The actions of its client advisors regarding the spreads and/or interbank prices for transactions in OTC bonds and structured products were potentially deceitful. UBS itself reported the misconduct to the MAS in 2016, prompting investigations.

The MAS says that its investigations showed that in numerous transactions the client advisors either:

did not adhere to the spread or interbank price of a trade as agreed with or understood by the client; or
failed to disclose or made only partial disclosure to the client when theinterbank price of a limit order improved; or
overcharged the clients in excess of the fees set out in the fee disclosure documents that the bank had sent to them.