Swiss bank UBS has been ordered to pay a £9.45 million fine for mis-selling an investment scheme that netted more than £6 billion from well-heeled investors. However, and probably of greater importance to UBS, the bank managed to dodge a more serious penalty from the American Securities and Exchange Commission that could have destroyed the bank’s ability to manage the money of its clients. Finally, in a move that could roil the bank and financial markets, USB announced that it’s pulling out of Euribor.

Mis-Sold Investment Scheme

In the first incident, the Financial Services Authority (FSA) fined the bank for mismanaging the sales of the AIG Enhanced Variable Rate Fund. FSA also charged that the bank didn’t adequately deal with customer complaints. For that error, the FSA ordered UBS to pay its clients another £9.45 million in investment compensation.

This is the second blow to UBS after it was hammered with a £940 million fine back in January for its role in the still unfolding Libor scandal.

The FSA regulator stated that the bank failed its due diligence obligations in carrying out the sale of the AIG financial instruments. This resulted in the bank not understanding the type of investment it was placing client’s money into, nor did the bank properly understand what the risks were present in these investments. According to FSA, UBS sold this investment scheme as a cash fund that invested in money markets. That, though, did not happen. Instead, a sizable amount was funneled into assets like UK sub-prime mortgages.

The FSA also discovered that four investors were talked into investing 50 to 100 percent of their portfolio into the AIG scheme.

These sales took place between December 2003 and September 2008, enticing nearly 2,000 customers of high wealth into the scheme. These clients included both investment fund concerns and wealthy individuals. On average, investors kicked in about £3 million each.

After the financial crisis began in 2007, clients began a run on the fund, but the fund was suspended in September 2008. This action effectively barred customers from withdrawing their investments from the AIG fund. Clients complained, and FSA began its investigation. During this time, many of these assets plummeted and lost value. Shares of AIG also fell. UBS has agreed to pay about £10 million in compensation to clients who were denied the option to withdraw their money.

FSA conducted a sampling of 33 customers and discovered that 19 had been mis-sold these financial instruments. The watchdog also found that all 11 customers it had reviewed had been unfairly assessed. “UBS’s conduct fell far short of what its customers deserved and what the FSA requires,” said Tracy McDermott, who is the chief officer in charge of financial crimes and enforcement at the FSA.

In the U.S., meanwhile, the Securities and Exchange Commission (SEC) gave UBS Financial an exemption from enforcing a penalty for defrauding counterparts. The penalty could have barred the bank from engaging in the money management of client’s money, including mutual funds and funds of funds, according to a story in Barrons. The penalty would have been enforced for 10 years.

The U.S. has a law that can penalize an investment company that pleads guilty to security crimes. The law is little known and is rarely enforced.

The Japanese unit of UBS pleaded guilty last year before the U.S. Justice Department of manipulating benchmark interest rates and defrauding counterparties. After the admission of guilt, UBS forced out managers who were engaged in the fraud, paid $600 million in fines, tightened up its controls and cooperated with investigators.

The law calls for an automatic ban of an investment company if judged guilty of a crime. A ban would have been a killer for a bank like UBS that manages $78 billion in cash and bonds for individuals and investors. UBS Global, for example, manages 20 mutual funds with a combined value of $6 billion.

Apparently, Ken Berman, a former SEC investment management honcho, served as the lead advisor for UBS at the SEC meeting and argued that such bans are outdated. Berman is also a friend of Mary Jo White, the SEC chairman. He’s currently a partner at Debevoise & Plimpton.

UBS’ application for forgiveness had been printed in the Federal Register last February. After no objections were raised from any quarter, the exemption was granted by the SEC.

In another action related to UBS, the bank announced this week that it’s pulling out of money market benchmark Euribor as of March 28. In a statement by UBS, the bank said it plans to concentrate on dollar funding markets and the Swiss franc.

Euribor, the little brother of Libor, is used as a gauge to determine how much banks pay out to borrow from other banks.

Home mortgages, financial transactions and complicated derivatives are priced using Euribor. Trillions of euros are involved.


Maple Leaf Financial Services

Mis-Sold Investments

Each case is different and they are all assessed individually. Sometimes we can claim because investments were simply unsuitable and they were mis-sold. In other cases it may be because of technical shortcomings in contracts, regulatory issues or a combination of these factors.

‘Most of our clients had no idea there was a problem with their policies or investments before they spoke with us. You have nothing to lose by calling us to find out about your own arrangements.’

Interest Rate Swap Claims

We have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are very happy to review these relatively complex arrangements and to claim compensation for our clients where appropriate.

If you believe you have incorrectly been classified as a ‘sophisticated’ customer and have, therefore, not been eligible for redress.  Maple Leaf Financial will review your interest rate product and we will be happy to discuss your individual concerns and requirements : 0800 7747624


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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.