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The FSA’s largest fines No1: £17 million Shell — for market abuse regarding reserves

The Times

November 6, 2009

FSA condemns weak controls at UBS

Michael Herman The Financial Services Authority (FSA) has fined UBS £8 million for weak controls that allowed staff in its private bank to make thousands of unauthorised trades with clients’ money and then hide the losses. It is the third-largest fine awarded by the FSA.

Four private bankers in UBS’s London office were able to deal in foreign exchange and precious metals without permission for almost two years.

A UBS investigation found the four, who have not been named, were making up to 50 unauthorised trades a day across 39 client accounts between January 2006 and December 2007.

UBS refused to say how much had been lost through the rogue trades but confirmed that it has paid clients £26 million in compensation. The four individuals no longer work for UBS.

The FSA said it would have fined UBS £10 million but offered a 20 per cent reduction in return for the bank’s co-operation and an agreement not to appeal the penalty. It said that UBS had ignored “several warning signs” that should have alerted management to investigate controls.

The rogue trading took place on UBS’s international wealth management arm, which caters to high net worth foreign investors. The FSA said three of the four were client advisers, who dealt directly with private banking clients, and the other was a desk head, their supervisor.

To hide their losses, the rogue traders deliberately targeted accounts where the client had chosen not to have regular statements sent to them.

They also created a series of sham loans that allowed them to move money constantly between accounts to cover their losses. This was done by offering clients with spare cash the opportunity to “lend” money to other clients. The clients were tricked into agreeing to the loans after being sent forged documentation on UBS headed notepaper.

Margaret Cole, head of the FSA’s enforcement division, said: “These employees were able to take advantage of UBS’s inadequate systems and controls, giving them free rein to make unauthorised trades with customer money that they were then able to conceal.”

The FSA chastised UBS for a series of weak controls, including a system that allowed client advisers to book trades without an independent check. It said UBS’s wider business model failed to mitigate against the risk that senior bankers “would act incompetently or dishonestly”.

UBS said that it “deeply regrets” the incident and “has already taken full remedial steps”.

Both UBS and the FSA declined to comment on the individuals. The FSA refused to say whether the four have been banned from working in the City or are subject to an investigation.

The FSA fine is part of a tougher approach by the regulator, which has vowed to crack down on abuse in the City.

Ms Cole said: “It is imperative, particularly in these more challenging financial conditions, that firms have suitable systems and controls to keep their houses in order.

“Where firms fall short in this area, the consequences will be severe.”

Simon Morris, of CMS Cameron McKenna, the law firm, said the fine was “good news for the FSA, which now comes across as the credible deterrent against financial crime that it has so long talked about becoming”.

The FSA secured its second crimnal conviction for insider dealing yesterday, when a father and son were found guilty.

In July the regulator proposed tripling fines for breaches of its rules, a move Ms Cole said was designed to “grab the attention of corporates and their boards”.

Under the new rules, due to come into force next year, businesses can be fined up to 20 per cent of revenue from the business line related to the regulatory action. Individuals may be fined up to 40 per cent of pre-tax income, including bonuses.

The FSA’s largest fines

£17 million: Shell — for market abuse regarding reserves

£13.9 million: Citigroup — for weak controls

£7 million: Alliance & Leicester — for PPI sales failings

£6.4 million: Deutsche Bank — for inaccurate statements

£5.6 million: Credit Suisse — for weak controls

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