HK regulator imposes HK$400m fine on UBS for overcharging its clients
The overcharge practices affected about 5,000 Hong Kong-managed client accounts in about 28,700 transactions.
Hong Kong’s Securities and Futures Commission (SFC) today announces the imposition of HK$400 million fine on UBS AG for overcharging its clients over a 10-year period and for related serious systemic internal control failures.
The overcharges occurred through post-trade spread increases and charges in excess of standard disclosures or rates between 2008 and 2017. The overcharge practices affected about 5,000 Hong Kong-managed client accounts in about 28,700 transactions.
The SFC has found that, between 2008 and 2015, the client advisors (CAs) and client advisors’ assistants (CAAs) in UBS’s Wealth Management division had overcharged clients when conducting bond and structured note trades by increasing the spread charged after the execution of trades without clients’ knowledge; and between 2008 and 2017, UBS had also charged its clients fees in excess of its standard disclosures or rates.
Specifically, following their clients’ requests to buy or sell products, the CAs and CAAs would enter the limit order price of the clients’ trades into UBS’s client order processing system. In circumstances where the actual execution price achieved in the market was better than the limit order price, the CAs and CAAs would increase the spread after executing the trades in order to retain the price improvement for UBS without agreement with, or disclosure to, the clients, and sometimes misreported the execution price or spread to the clients.
The SFC’s investigation further revealed that UBS failed to understand and properly disclose the capacity in which it acted for its clients when conducting secondary market bond and structured note trades. UBS acknowledged that its historical approach to capacity was confused, its past communications with regulators regarding its capacity were incomplete, and its communications with clients on whether it was acting as their agent or principal were unclear and, in some cases, erroneous.
The regulator has also found that UBS failed to report its spread overcharge practices to the SFC until two years after the identification of the misconduct. This was not an isolated incident, but was one of a number of late reporting incidents whereby UBS failed to report the relevant misconduct to the SFC in a timely manner, or at all.
After UBS implemented a new order taking platform, One Wealth Management Platform (1WMP), in October 2017, it reported 15 incidents to the SFC or the Hong Kong Monetary Authority relating to the failures of 1WMP covering a variety of issues, including further spread overcharges. These issues call into question UBS’s capability to put in place effective remediation to address the spread overcharge practices and proper internal controls to avoid the recurrence of historical deficiencies.
In deciding the disciplinary sanctions, the SFC considered a variety of factors, including:
- the elements of dishonesty in UBS’s spread overcharge practices;
- the duration of UBS’s spread overcharge practices, i.e. around ten years;
- the fact that UBS’s spread overcharge practices were undetected for at least seven years;
- the serious and systemic nature of UBS’s internal control failures;
- UBS’s disciplinary actions against over 20 staff who had engaged in the malpractice;
- UBS’s appointments of independent reviewers to (i) identify the root causes of the spread overcharge practices and assess the magnitude of its spread overcharge practices, (ii) validate the relevant overcharge and compensation arising from 1WMP, and (iii) review the adequacy and effectiveness of UBS’s remediation measures; and
- UBS’s agreement to fully compensate the affected clients.
