On March 19, the United Kingdom Financial Conduct Authority (FCA) announced that it had fined UBS AG (UBS) £27,599,400 for failings relating to 135.8 million transaction reports over nearly a decade, between November 2007 and May 2017. The FCA stated that UBS
failed to ensure it provided complete and accurate information in relation to approximately 86.67m reportable transactions. It also erroneously reported 49.1m transactions to the FCA, which were not, in fact, reportable. Altogether, over a period of 9 and a half years, UBS made 135.8m errors in its transaction reporting, breaching FCA rules.
The FCA found that the 135.8 million transactions were the result of 42 errors, for which there were three main root causes (or, in some cases, a combination of those root causes): (1) errors in UBS’s systems, IT logic, and/or reporting processes; (2) weaknesses in change management controls; and (3) weaknesses in controls around the maintenance of static data. The 135.8 million errors constituted approximately 7.5 percent of the 1.8 billion transaction reports that UBS submitted during the relevant period.
In addition, the FCA found that UBS failed to take reasonable care to organize and control its affairs responsibly and effectively with respect to its transaction reporting. “These failings,” the FCA stated, “related to aspects of UBS’s change management processes, its maintenance of the reference data used in its reporting and how it tested whether all the transactions it reported to the FCA were accurate and complete.”
In its Final Notice, the FSA took into consideration that UBS had recognized the failures within its control framework and either remediated, or had substantially commenced the process of doing so after July 31, 2014. It also acknowledged that UBS self-identified and notified it of more than 85 percent of the reporting errors described in the Notice, “and has committed significant resources to improving its transaction reporting controls.”
Because UBS agreed to resolve the case, it qualified for a 30 percent discount in the overall penalty. Absent the discount, the FCA stated that it would have imposed a financial penalty of £39,427,795. In response to the FCA’s action, a UBS spokesperson reportedly said that “there had never been any impact on clients, investors or market users, but the bank had improved its systems and controls.”
Note: A transaction report, according to the FCA, is a data set that a financial firm submits to the FCA relating to “an individual financial market transaction which includes, but is not limited to, details of the product traded, the firm that undertook the trade, the trade counterparty, the client (where applicable) and the trade characteristics, price, quantity and venue.” The FCA states that it uses the information from transaction reports for four purposes: (1) monitoring for market abuse; (2) firm supervision; (3) market supervision; and (4) sharing with certain external parties, such as the Bank of England.
The basis for the FCA’s rules on transaction reporting are the European Union Markets in Financial Instruments Directive (2004/39/EC) (MiFID), in effect from November 2007 until January 2018, and MiFID II, in effect since January 2018. MiFID and MiFID II are EU legislation “that regulates firms who provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.” MiFID II revised the MiFID requirements in a number of areas, including extending transaction reporting requirements to include additional instruments.
Although the FCA has fined a dozen other financial firms since 2009 for transaction reporting violations, its action against UBS is significant in two respects. First, the number of transactions associated with UBS’s reporting failures (135.8 million) is by far the highest of any of the 13 FCA MiFID cases. Second, the amount of the £27.6 million fine is the highest ever imposed for such MiFID violations – more than double the amount of the next highest fine. United Kingdom financial firms should review the UBS Final Notice with care, and use the FCA’s factual findings therein as a point of reference to check their own systems’ MiFID II compliance.