Swiss bank UBS has been fined £9.45 million for mis-selling the AIG Enhanced Variable Rate fund to hundreds of customers in the run up to the financial crisis.
The Financial Services Authority (FSA) ruled on Monday that failures in the sale of the fund led to UBS customers being exposed to "unacceptable risk", and accused UBS of failing to deal properly with complaints from customers.
Between 1 December, 2003 and 15 September, 2008 UBS sold the Fund to 1,998 high net worth customers, with initial investments totalling approximately £3.5 billion. The fund invested in financial and money market instruments but, unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of the Fund’s assets in asset backed securities and floating rate notes.
During the financial crisis of 2007 and 2008, the market values of some of the assets in the fund fell below their book values. Then on 15 September, 2008, Lehman Brothers applied for Chapter 11 bankruptcy protection in the US - leading to AIG's share price to fall sharply and suddenly.
A large number of investors sought to withdraw their investments and there was a run on the fund. As a result, the fund was suspended - meaning customers weren't allowed to withdraw all of their investment. At that point 565 UBS customers had approximately £816m invested in the Fund.
A sample review by the FSA of sales of the Fund to 33 customers found that 19 were mis-sold and a considerable risk that 12 of the remaining 14 may have been mis-sold. The FSA also reviewed 11 complaints made by these customers and found that all 11 had been assessed unfairly (although six had been upheld by UBS).
UBS has agreed to conduct a redress programme for those customers who remained invested in the fund at the time of its suspension - costing it around £10m.
UBS's failings were serious and included:
- failing to carry out adequate due diligence on the fund before selling it to customers, and failing to ensure its advisers were provided with appropriate training
- UBS advisers recommending the fund to some customers even though it did not provide the level of capital security that they apparently sought
- indicating to customers that the fund was a cash fund that invested in money market instruments. Instead a significant proportion of the fund was invested in other assets
- failing to respond appropriately during the 2007-08 financial crisis when UBS had concerns about the fund - UBS did not review past sales to ensure that they were suitable, nor did it ensure that its advisers provided a fair and accurate explanation of the risks when reassuring existing customers
- failing to assess customer complaints relating to sales of the fund fairly, despite conducting a thorough investigation of those complaints
- not maintaining adequate sales records
Tracey McDermott, director of enforcement and financial crime, said banks such as UBS should be under no illusion about the standards expected of them.
"UBS's conduct fell far short of what its customers deserved and what the FSA requires. It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the fund came to the fore.
"We have made our expectations in relation to the wealth management industry clear. UBS has paid the price for its failures and we will continue to take strong action against firms who fail to do the right thing for their customers."
UBS agreed to settle at an early stage entitling it to a 30% discount on its fine. Were it not for this discount, the FSA would have imposed a financial penalty of £13.5m on UBS.
UBS isn't the only bank to have been fined for mis-selling an AIG fund - On 8 November, 2011, the FSA fined Coutts & Company £6.3m for failings relating to its sale of the same AIG fund.