UBS fined £9.45m for failings in its sale of an AIG fund

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.  On 15 September 2008, Lehman Brothers applied for Chapter 11 bankruptcy protection in the US and AIG's share price then fell 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 with customers prevented from immediately withdrawing all of their investment.  At that point 565 UBS customers had approximately £816 million 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 (albeit that 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.  It is estimated that compensation payable to customers will be around £10 million.  

UBS’s failings were serious and included:  

•  failing to carry out adequate due diligence on the Fund before selling it to customers, so UBS had an inadequate understanding of the nature of the Fund’s assets and the consequent risks.  In addition, UBS failed to ensure its advisers were provided with appropriate training about the Fund so could not correctly determine its suitability for customers;  
• advisers recommending the Fund to some customers even though it did not provide the level of capital security that they apparently sought.  Customers were not sent suitability reports when UBS sold the Fund, so customers were not given a record of why the Fund was suitable for them;
•  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 and also realised that there was a greater risk of the Fund suspending redemptions and of customers suffering a loss.  Although UBS took steps to improve its knowledge of the Fund, it did not take appropriate action to address its concerns and the way it sold 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; and
•  not maintaining adequate sales records, including a record of whether a customer was sold the Fund on an advised, discretionary or non-advised basis.

As a result of these failings, UBS breached FSA Principle 9 (ensuring the suitability of its advice) and Principle 6 (treating customers fairly).

Tracey McDermott, director of enforcement and financial crime, said:

“Firms 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 £13.5 million on UBS.

Notes for editors

1. Read the Final Notice for UBS[1].
2. The AIG Life Premier Access Bond, Enhanced Variable Rate Fund (the Fund) was launched in December 2003 and was supplied by American Life Insurance Company (ALICO), a UK branch of a wholly owned subsidiary of American International Group (AIG).  It was invested in financial and money market instruments, including certificates of deposit, bank deposits and commercial paper.  However, 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.  Some of these assets had terms to maturity of between 3 and 5 years.
3. During the financial crisis of 2007 and 2008, the market values of some of the assets in the Fund fell below their book values.  On 15 September 2008 Lehman Brothers applied for Chapter 11 bankruptcy protection in the US and AIG’s share price then fell sharply and suddenly. A large number of investors sought to withdraw their investments and there was a run on the Fund.  As a result ALICO suspended the Fund.
4. At the time of the Fund’s suspension 565 UBS customers holding 618 policies with approximately £816 million invested in the Fund.  These customers were subsequently permitted to withdraw only 50% of the full value of their investment (capital plus accrued interest).  On 14 December 2008 customers were given the opportunity to withdraw the remaining 50% but for less than its par value on that date (a 13.5% reduction in the value of their entire accrued investment).  However, customers were given the option of transferring their remaining 50% into a Protected Recovery Fund (PRF) which guaranteed that customers would get back this proportion of their investment in full if they kept their money in the PRF until 1 July 2012.  The vast majority of customers chose the PRF option which meant they did not earn any investment return on this proportion of their investment until the closure of the PRF on 1 July 2012.  Fifteen customers withdrew either all or over 50% of their investment in December 2008 and suffered a loss of approximately 27% of the accrued value of the withdrawn amount which exceeded 50% of their investment.  
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
6. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012[2].