A large-cap investment bank is supposed to have a more robust compliance mechanism than mid-cap/small-cap ones, but it is not immune from regulatory breaches.
On 3 Aug 2021, SFC announced it reprimanded and fined UBS AG and UBS Securities Asia Limited (UBSSAL) (collectively, UBS) $9.8 million and $1.75 million respectively over various regulatory breaches.
Disclosure of financial interests in research reports
- Between May 2004 and May 2018, UBS failed to make proper disclosure of its financial interests in some Hong Kong listed issuers covered in its research reports in breach of para. 16.5(a) of the Code of Conduct.
- The failure was caused by (i) multiple data feed logic errors in relation to a legacy data source used by UBS for tracking its shareholding positions; and (ii) UBS’s lack of proper systems and controls to test the accuracy of, and detect the logic errors in, the data feeds.
- Based on UBS's review, the failure affected 80 (6.43%) research reports issued by UBSSAL and 125 (14.59%) research reports issued by UBS AG during sample periods between Sep 2017 and May 2018.
Compliance with the Client Securities Rules ("CSR") and Contract Notes Rules ("CNR")
- Between Nov 2012 and Feb 2019, UBS AG failed to diligently supervise its client advisors and implement sufficient controls to ensure that only professional investor ("PI") clients were subscribed to the securities pooled lending ("SPL") service. As a result, 2,263 non-PI clients were subscribed to the SPL service, out of which 91 clients entered into 913 SPL transactions with UBS AG.
- As UBS AG had wrongly assumed that these clients were PIs, it failed to obtain valid standing authorities from and issue contract notes to them in respect of the SPL transactions, in breach of sections 4 and 7 of the CSR and section 5 of the CNR.
Compliance with the telephone recording requirement
- Between Aug 2017 and Jun 2019, UBS AG had failed to record client order instructions received through the telephone in breach of paragraph 3.9 of the Code of Conduct:
- Between Aug 2017 and Dec 2017, the order instructions placed through 8 overflow lines for 2,006 transactions executed for 364 clients were not recorded. This was caused by an omission in the voice recording setting during the migration of UBS AG’s telephone system to a new system. Due to the wrong assumption held by the project team responsible for the migration that overflow lines of UBS AG’s wealth management department would be automatically recorded after migrating to the new telephone system, it failed to enable the recording function of such phone lines during and after the migration.
- Between Nov 2018 and Jan 2019, the order instructions placed. through a telephone line for 20 transactions executed for 5 clients were not recorded. This was caused by an omission to re-activate the voice recording function when the telephone line was transferred from a former client adviser to a newly joined client adviser.
- Between 13 and 17 Jun 2019, the order instructions placed through 26 telephone lines for 96 transactions executed for 51 clients were not recorded. This was caused by human error in the course of transitioning UBS AG's telephony system from Skype for Business soft phones to Cisco desk phone which led to a break in the voice recording system.
Assessment of clients' derivatives knowledge
- Prior to 2018, UBS AG required its staff to obtain trading evidence (such as bank statements) from clients who declared that they had conducted five or more derivative trades in the past 3 years. UBS AG discontinued this practice in 2018 due to its misinterpretation of another FAQ issued by SFC.
- As a result, between 2 Jan 2018 and 17 Jun 2020, UBS AG failed to follow applicable regulatory guidelines relating to the assessment of clients' derivative knowledge by failing to obtain trading evidence from 858 clients who declared that they had conducted 5 or more derivative trades in the past 3 years, in breach of paragraph 5.1A of the Code of Conduct. Out of these 858 clients, 380 of them have subsequently traded derivative products with UBS AG.
Disclosure of product risk
- UBS AG had failed to disclose to its clients the "stop loss event" feature of a structured note issued by an issuer (Notes) before trade execution. The failure affected 15 client accounts involving the sale of 12 Notes between Oct 2017 and Feb 2020 for a total notional amount of about US$12 million.
- UBS AG's disclosure failure was caused by an omission of the stop loss event feature in the additional product sheet prepared by UBS AG's Structured Product Sales Team in Singapore (SP Team). The SP Team member who prepared the additional product sheet was not aware of the stop loss event feature. When another SP Team member reviewed the draft additional product sheet, he noted that the stop loss event feature was not included but he did not raise any issues as he considered the stop loss event feature to be insignificant as compared to the issuer default risk. UBS AG discovered the failure when handling a client complaint in Apr 2020.
Other investment banks may take this comprehensive case as a good reference when reviewing their own internal controls.
