UBS AG

On 8 February 2013, the FSA imposed a financial penalty of £9,450,000 on UBS AG (UBS) in respect of UBS' failure to comply with Principle 9 and Principle 6 of the FSA's Principles for Businesses and certain rules set out in the FSA handbook in connection with its sales of the AIG Life Premier Access Bond, Enhanced Variable Rate Fund (the Fund) between 1 December 2003 and 15 September 2008 and its handling of related complaints between 15 September 2008 and 20 September 2011. UBS agreed to settle at an early stage of the FSA's investigation. UBS therefore qualified for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £13,500,000 on UBS. During the Relevant Period, UBS AG: (1) failed to conduct adequate due diligence on the Fund before selling it to customers. As a result, UBS had insufficient understanding of the nature of the assets in the Fund and the consequent risks associated with it. Furthermore, between January 2004 and August 2007, UBS failed to monitor effectively the asset composition of the Fund; (2) failed to have an adequate sales process in place for the Fund. UBS' advisers were not provided with adequate training on the Fund and its features and risks. As a result, UBS did not ensure that advisers understood the risks of the Fund and could determine correctly whether the Fund was suitable for their customers; (3) did not adequately capture customers' tolerance to risk in relation to the liquidity element of their portfolios with UBS, as well as customers' risk tolerance for their portfolios as a whole as part of the sales process of the Fund, and failed to ensure that annual reviews of customers' risk profiles and portfolios were performed; (4) recommended the Fund to some customers even though it did not provide them with the level of capital security they appear to have required. UBS did not send suitability reports to customers to whom it sold the Fund. This meant that customers did not receive a written explanation of why the Fund was suitable for them taking into consideration their circumstances and investment objectives, including any competing objectives, or an explanation of the trade-off between the Fund's risks and returns. Further, there was no compliance monitoring review of any of the 1,998 sales of the Fund which could have rectified this failing; (5) indicated to customers that the Fund was a cash fund which invested in money market instruments. However, a significant proportion of the Fund was invested in assets which did not meet this description and customers may have misunderstood the true position about the risks they were assuming; (6) failed to respond appropriately during the financial crisis in 2007 and 2008 when it had concerns regarding the sale of the Fund and also realised there was a greater risk of the Fund suspending redemptions and of customers suffering a loss. In the third quarter of 2007, UBS took steps to improve its knowledge of the types of assets within the Fund and the risks associated with the Fund. Nevertheless, UBS failed to take appropriate action to address its concerns and the way in which it continued to sell the Fund. UBS also failed to ensure that advisers who sought to reassure existing customers inquiring about their investments in the Fund provided a fair and accurate explanation of the risks. Further, UBS failed to review its past sales of the Fund to ensure that these had been suitable for customers; (7) despite conducting a thorough investigation of customer complaints relating to its sale of the Fund, failed to assess those complaints fairly; and (8) failed to maintain adequate records of its sales of the Fund. As a consequence of the above failings, UBS' customers were exposed to an unacceptable risk of an unsuitable sale of the Fund and were not treated fairly. At the time of the Fund's suspension on 15 Septer 2008, 565 UBS customers holding 618 policies had approximately £816 million invested in the Fund. Of these, 119 customers had complained by September 2011. The FSA reviewed sales of the Fund made by UBS to 33 of its customers. It found that 19 of those 33 customers were mis-sold the Fund and that there was a considerable risk that 12 of the remaining 14 may have been mis-sold the Fund (albeit that customer contact would be required to determine whether those sales were actually unsuitable). The FSA also reviewed complaints made by 11 customers who had been sold the Fund and found that all 11 complaints had been assessed unfairly, albeit that six had been upheld by UBS. Following discussions with the FSA, UBS agreed to conduct a redress programme in relation to sales of the Fund to its customers who remained invested at the time of the Fund's suspension on 15 September 2008. It is estimated that compensation payable to customers will be in the region of £10 million.