UK’s FSA fines UBS in the wake of Adoboli conviction –
29 Nov 2012
The UK’s Financial Services Authority has fined UBS GBP42.4 million (discounted to GBP29.7 for early settlement) for failures in systems and controls that allowed trader Kweku Adoboli to lose more than USD2,300 million.
To lose one chunk of cash is unfortunate, to lose two is careless or so the FSA seems to think in relation to UBS.
A report in CNBC in June this year says that UBS might be sitting on a loss of as much as USD350 million resulting from the Facebook mess. The reason?
Some have told the news channel that UBS wanted a particular number of shares. But confirmations did not arrive quickly and so, thinking that the orders had not been placed, UBS kept pressing “send” or similar. The orders were received and were filled – some say that UBS ended up with ten times more shares than it intended to take. UBS is one of several investors who are looking for suitable targets for law suits
But the big difference between the US losses and the London losses is not the amount of money (although that is significant) but the fact that in London the trades were unauthorised and UBS failed to pick it up.
Adoboli’s trial is unusual:
he’s been arrested, tried, convicted and sentenced in a little over a year: white collar crime trials usually take much longer – in this case much of the investigation took place before he was arrested. His lawyers alleged that the bank had culture of ignoring trading limit breaches if a trader was making money. That sounds remarkably like the Barings issue from more than a decade ago, proving that the City doesn’t learn from its mistakes.
The bank fired Ron Greenidge, head of UBS’s exchange traded funds desk, in April 2011 when the losses came to light. Greenidge told the Court he was fired for “gross misconduct” for failing to spot the problems, saying that Abodoli’s actions in creating false trades and even fictitious accounts (again, remember Barings) was not known to him.
That September 2011 date is important, as is the April 2011 dismissal. The FSA says:
“On 14 September 2011 UBS became aware that unauthorised trading had been carried out between 1 June 2011 and 14 September 2011 (the Relevant Period) on the Exchange Traded Funds Desk (the Desk) in the Global Synthetic Equities (GSE) trading division conducted from the London Branch of UBS.
“The losses were incurred primarily on exchange traded index future positions. The underlying positions were disguised by the use of late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades.
“During the Relevant Period, there was insufficient focus on the key risks associated with unauthorised trading within the GSE business conducted from the London Branch. The significant control breakdowns allowed the trading to remain undetected for an extended period of time.
“The FSA believes that UBS failed to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and failed to conduct its business from the London Branch with due skill, care and diligence.”
Somewhere, the dates don’t stack up.
However, the FSA’s findings are comprehensive:
In particular UBS’ failings included:
•The computerised system operated by UBS to assist in risk management was not effective in controlling the risk of unauthorised trading.
•The trade capture and processing system had significant deficiencies, which Adoboli exploited in order to conceal his unauthorised trading. The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems.
•There was an understanding amongst personnel supporting the Desk that the Operations Division’s main role was that of facilitation. Their main focus was on efficiency as opposed to risk control and they did not adequately challenge the Front Office.
•There was inadequate front office supervision. The supervision arrangements within GSE were poorly executed and ineffective.
•The Desk breached the risk limits set for their desk without being disciplined for doing so. These limits represented a key control and defined the maximum level of risk that the Desk could enter into at a given time. This created a situation in which risk taking was not actively discouraged or penalised by those with supervisory responsibility.
•Failing to investigate the underlying reasons for the substantial increase in profitability of the Desk despite the fact that this could not be explained by reference to the end of day risk positions.
•Profit and loss suspensions to the value of $1,600 million were requested by Adoboli during the course of August 2011. Prior to 18 August 2011, these were accepted without challenge or escalation. The combined factors of unexplained profitability and loss suspensions should have indicated the need for greater scrutiny.
These failings are particularly serious because:
•Market confidence was put at risk, given the sudden announcement to the market and size of the losses announced. Negative announcements, such as this, put at risk the confidence which investors have in financial markets.
•The systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls.
•The failings enabled Adoboli to commit financial crime.
The penalty was fixed at 15% of the revenue of the GSE trading divisio
But there’s a aggravating factor, hence the botched reference to Oscar Wilde at the top of this piece.
The FSA reminds us that “It also took into account the fact that in November 2009 UBS was fined £8 million for failings in relation to the systems and controls around the international wealth management business conducted with non-UK resident clients in the London branch of UBS. The FSA expects firms to consider whether the issues identified in an enforcement action are applicable to other business areas and whether remedial action is necessary, UBS failed to do this.”
Again, when will the City learn from its mistakes?
The FSA says ”
UBS agreed to engage an independent firm to conduct a substantive investigation into the unauthorised trading incident, expending considerable resources (approximately £16 million to date) in doing so. UBS’s new senior management has committed significant resources to undertake an extensive programme of remediation.”
That smacks of the response of US regulators, which, allegedly, upon being told that a certain bank had spend some USD30 million on a system that it hoped would detect and deter money laundering saw its fine conveniently reduced by a corresponding amount.
In addition, the FSA says,
“UBS has taken disciplinary action against employees who were involved in the events which gave rise to these breaches, including clawing back bonuses and withholding 50% of their deferred compensation from relevant individuals totalling more than GBP34 million.”
So, let’s work this out:
the fine should have been GBP42.4 million and the spending on investigating the problem is a further GBP16 million, a total of GBP58.4 million.
But the fine was reduced to GBP29.7m – so the total fine plus investigation is GBP45.7.
Of that, some GBP34 million has been clawed back, so the total cost of penalties and investigation has been a nett GBP11.7 million.
For sure, there’s a huge trading loss hole to consider but that, as the FSA seems to think, is by way of carelessness on the part of the bank, not by any wilful culpability of anyone supervising the young trader.
Loading...