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UBS Fined by FSA over AIG Fund Sale

Zacks Equity Research

In yet another blow to its reputation, UBS AG (UBS) has been ordered to pay nearly £19.5 million ($30.5 million) in fines and compensation by the UK financial regulator, Financial Services Authority (FSA). The company has been accused of exposing its customers to undesirable risk while selling a fund managed by American International Group, Inc. (AIG).

Of the total amount, approximately £9.5 million ($14.8 million) is the penalty that UBS has to pay to the FSA for not exercising proper due diligence when it sold the AIG Enhanced Variable Rate Fund to about 2,000 high net worth customers during the 2003-2008 period. Though basically a money market fund, it also invested in asset-backed securities and floating rate notes.

During the financial crisis, the fund’s value started diminishing and many customers withdrew their money. However, the fund was suspended and investments worth £816 million of about 565 clients’ were stuck in the fund. Hence, the company will be paying roughly £10 million ($15.7 million) as compensation to these customers.

Further, the FSA alleged UBS of lacking a proper redress mechanism in place to deal with customer complaints. The regulator stated that the company mis-sold the fund to at least 19 clients while nearly 11 customer complaints were not appropriately managed.

Nevertheless, as UBS agreed to an early settlement of the FSA’s inquiry, it qualified for 30% discount on the fine. Otherwise, the FSA would have imposed a £13.5 million penalty on the company.

In addition to UBS, Coutts – the private banking arm of The Royal Bank of Scotland Group plc (RBS) – was fined £6.2m in 2011 by the FSA for the same fund. Moreover, the allegations against Coutts were the same.

UBS has been facing investigations and penalties for its conduct leading to the financial crisis. In Dec 2012, UBS announced that it will be paying a penalty of CHF 1.4 billion to the U.S., UK and Swiss authorities to resolve charges for its involvement in the manipulation of the London Interbank Offered Rate (:LIBOR).

Also, in Nov 2012, the company was slapped with a fine of £29.7 million by the FSA for failing to prevent significant unauthorized trading that resulted in a substantial loss of about $2.3 billion.

We believe the resolution of UBS’ regulatory probes is encouraging and this is reflected in the company’s Zacks Rank. Currently, the company retains a Zacks Rank #2 (Buy). Among other foreign banks, Bank of Montreal (BMO) carries a Zacks Rank #1 (Strong Buy) and is worth considering.

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