John Pottage, the former chief executive officer of UBS AG (UBSN)’s wealth-management unit in the U.K., is challenging Britain’s finance regulator over its intention to fine him 100,000 pounds ($159,000) for failing to prevent unauthorized trades at the division.
Pottage, who is now a senior executive at the bank’s headquarters in Zurich, worked to improve systems and controls in the wealth-management unit when he started as its CEO in September 2006 and doesn’t deserve a fine, his lawyer, Guy Philipps, said in court papers. Pottage is challenging the penalty at a London hearing that started today.
The Financial Services Authority alleged that Pottage “should have acted ‘sooner than he did’ to instigate a much wider investigation into whether there might be other weaknesses in controls,” Philipps said. Pottage, who UBS moved to Zurich amid the FSA probe, “strongly denies that charge,” and “is supported in that denial by UBS, of which he remains a senior executive.”
The case is another instance of risk-management failures at the bank, several years before Kweku Adoboli, a former trader in UBS’s investment bank, was charged with causing the bank $2.3 billion in losses through unauthorized trading.
Fraud, False Accounting
Adoboli, who was charged with fraud and false accounting tied to the loss, will enter a plea at a London criminal court next week. He is accused of causing the losses through trades in Standard & Poor’s 500, DAX and EuroStoxx index futures, with the risk masked by fictitious positions, UBS has said.
The allegations against Pottage relate to an FSA investigation where it fined the Swiss lender 8 million pounds in 2009, at the time the third-largest penalty levied by the regulator. The FSA found that UBS didn’t prevent its international wealth-management employees from making as many as 50 unauthorized trades a day with funds from at least 39 customer accounts.
When UBS was fined in 2009, the regulator said the bank had already paid more than $42 million to compensate customers. The FSA found that four UBS employees on one desk made unauthorized foreign exchange and precious metals trades over a two-year period. All four have left the bank.
The breaches came to light when a whistleblower notified the bank’s compliance department about a proposed transfer of funds from a customer’s account to a desk head’s personal account, according to the FSA.
“Client money was exposed to unacceptable risk for many months,” a lawyer for the FSA, Andrew Hochhauser, said at the hearing today. The way the bank handled the errors by acting retroactively “was symptomatic of a greater problem within the risk framework.”
The bank, which is an interested party in the case, not a defendant, said it had identified weaknesses before the FSA opened the investigation, and had fixed them by June 2009.
“UBS does not believe this disciplinary action is justified,” it said in a statement.
Pottage failed “to carry out an adequate initial assessment” of the wealth-management unit’s business practices, and monitor them continuously, the FSA said in a submission to the court.
“If he had done so he would have identified serious flaws in the design and operational effectiveness of U.K. wealth- management’s governance and risk management frameworks,” the regulator said. Pottage isn’t accused of having been involved in any trades or having known about them.
Pottage was authorized by the FSA until Dec. 15, 2008, according to the watchdog’s website. He had authorization for roles including chief executive, significant management, director, apportionment and oversight, investment adviser and insurance mediator.
The FSA and the Swiss Financial Market Supervisory Authority are jointly investigating control failures at UBS that allowed Adoboli’s trades to go undetected.
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