On November 11, the Hong Kong Securities and Futures Commission (SFC) announced that it had reprimanded and fined UBS AG (UBS) $51 million (HK$400 million) “for overcharging its clients over a ten-year period and for related serious systemic internal control failures.”
The SFC set forth specific findings on two categories of misconduct:
- Overcharging: Between 2008 and 2015, UBS client advisors (CAs) and client advisors’ assistants (CAAs) in UBS’s Wealth Management division “had overcharged clients when conducting bond and structured note trades by increasing the spread charged after the execution of trades without clients’ knowledge.” In addition, between 2008 and 2017, UBS had also charged its clients fees in excess of its standard disclosures or rates. In particular, the SFC stated that
following their clients’ requests to buy or sell products, the CAs and CAAs would enter the limit order price of the clients’ trades into UBS’s client order processing system. In circumstances where the actual execution price achieved in the market was better than the limit order price, the CAs and CAAs 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, and sometimes misreported the execution price or spread to the clients. On some occasions, they would also falsify the account statements issued to financial intermediaries, who were authorized to trade for clients, by misreporting the spread amount to conceal the overcharges.
On these issues, the SFC concluded “that these malpractices involved a combination of serious systemic failures for a prolonged period of time including inadequate policies, procedures and system controls, lack of staff training and supervision, and failures of the first and second lines of defence functions of UBS.”
- Organizational Failures: The SFC identified three additional categories of organizational failures by UBS:
- Failure to Disclose: The SFC stated that UBS “failed to understand and properly disclose the capacity in which it acted for its clients when conducting secondary market bond and structured note trades.” It also noted that UBS “acknowledged that its historical approach to capacity was confused, its past communications with regulators regarding its capacity were incomplete, and its communications with clients on whether it was acting as their agent or principal were unclear and, in some cases, erroneous.”
- Failure to Report: The SFC stated that UBS “failed to report its spread overcharge practices to the SFC until two years after the identification of the misconduct.” It pointedly remarked that “[t]his was not an isolated incident, but was one of a number of late reporting incidents whereby UBS failed to report the relevant misconduct to the SFC in a timely manner, or at all.”
- Failure to Ensure Compliance: After the discovery of the spread overcharge practices, UBS implemented a new order taking platform, One Wealth Management Platform (1WMP), as system enhancements in October 2017. But, as the SFC stated, “instead of putting in place a system that ensures its compliance with relevant regulatory requirements, UBS reported 15 incidents to the SFC or the Hong Kong Monetary Authority relating to the failures of 1WMP covering a variety of issues, including further spread overcharges. These issues call into question UBS’s capability to put in place effective remediation to address the spread overcharge practices and proper internal controls to avoid the recurrence of historical deficiencies.”
Taking into account all of these circumstances, the SFC concluded that UBS failed to (1) “act honestly, fairly and in the best interests of its clients”; (2) “act with due skill, care and diligence, in the best interests of its clients”; (3) “avoid conflicts of interest and ensure that its clients are treated fairly”; (4) “provide adequate disclosure of relevant material information to clients”; and (5) “comply with all relevant regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients.”
In deciding on the disciplinary sanctions, the SFC stated that it took into account all relevant circumstances. Those included (1) “the elements of dishonesty in UBS’s spread overcharge practices”; (2) “the duration of UBS’s spread overcharge practices, i.e. around ten years”; (3) “the fact that UBS’s spread overcharge practices were undetected for at least seven years”; (4) “the serious and systemic nature of UBS’s internal control failures”; (5) “UBS’s disciplinary actions against over 20 staff who had engaged in the malpractice”; (6) “UBS’s appointments of independent reviewers to (i) identify the root causes of the spread overcharge practices and assess the magnitude of its spread overcharge practices, (ii) validate the relevant overcharge and compensation arising from 1WMP, and (iii) review the adequacy and effectiveness of UBS’s remediation measures”; and (7) “UBS’s agreement to fully compensate the affected clients.”
In addition to paying the $51 million fine, UBS committed “to compensate the affected clients by repaying them the full value of the overcharged amount together with interest.” The total amount of those repayments (approximately HK$200 million) “covers overcharges made through post-trade spread increases and charges in excess of standard disclosures or rates between 2008 and 2017. The overcharge practices affected about 5,000 Hong Kong-managed client accounts in about 28,700 transactions.”
N.B.: In view of the SFC’s findings, it is not in the least surprising that the SFC concluded “that these malpractices involved a combination of serious systemic failures for a prolonged period of time including inadequate policies, procedures and system controls, lack of staff training and supervision, and failures of the first and second lines of defence functions of UBS.” Accordingly, this case provides a number of lessons for financial institutions in and beyond Hong Kong.
Chief Compliance Officers at financial institutions should brief senior management officials in their firms about the key elements of this case, incorporate information from the case into their training materials (especially for senior and mid-level executives in their wealth management divisions), and check their compliance programs against the facts of this case to identify potential shortcomings or opportunities for improvement.