Banking giant UBS has been fined £29.7 million by the financial services watchdog for its failings which allowed Kweku Adoboli - known as the rogue trader - to lose £1.44 billion in unauthorised trading.
Adoboli was convicted of two counts of fraud by abuse of position on 21 November and sentenced to seven years' imprisonment, but during his trial he claimed his actions were a result of the culture at UBS.
The Financial Services Authority has now declared that the systems and controls failings revealed serious weaknesses in UBS’s procedures, management systems and internal controls.
Tracey McDermott, director of enforcement and financial crime, called UBS's systems and controls "seriously defective" and said it was the bank's failure to question the increasing revue of the desk which allowed a junior trader - Adoboli - to take "vast and risky" market positions.
“Failures of this type in firms of the size and standing of UBS not only damage the firms concerned but also wider confidence in the integrity of the markets and the financial system," she said in a statement this morning.
"It is imperative the markets we regulate are seen by investors to be orderly and a safe place to do business. This penalty - fixed at 15% of the revenue of the Global Synthetic Equities trading division (where Adoboli worked) - is intended to make it clear that the FSA expects much higher standards from the firms we regulate."
UBS could have faced a much bigger fine of £42.4 million, but received a discount for settling the dispute early.
On 14 September, 2011, UBS became aware that unauthorised trading had been carried out between 1 June, 2011 and 14 September, 2011 on the Exchange Traded Funds Desk in the Global Synthetic Equities trading division, conducted from the London Branch of the bank.
The losses were primarily on exchange traded index future positions and disguised by the use of late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades.
UBS was accused of insufficient focus on the key risks associated with unauthorised trading within the GSE business conducted from the London branch. The significant control breakdowns allowed the trading to remain undetected for an extended period of time.
The FSA said UBS failed to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and failed to conduct its business from the London branch with due skill, care and diligence.
Among the key failings were:
· The computerised risk management system was not effective in controlling the risk of unauthorised trading.
· The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems.
· There was inadequate front office supervision. The supervision arrangements within GSE were poorly executed and ineffective.
· The desk breached the risk limits set for their desk without being disciplined for doing so. These limits represented a key control and defined the maximum level of risk that the desk could enter into at a given time. This created a situation in which risk taking was not actively discouraged, or penalised, by those with supervisory responsibility.
· UBS failed to investigate the underlying reasons for the substantial increase in profitability of the desk, despite the fact that this could not be explained by reference to the end of day risk positions.
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