UBS AG (UBSN) was fined 29.7 million pounds ($47.6 million) by the U.K. and told by the Swiss that it may have to increase capital levels for operational risks as regulators levied penalties after Kweku Adoboli’s $2.3 billion trading loss.
The Financial Services Authority in the U.K. issued the fine today, saying the loss revealed serious weaknesses in management systems and internal controls. Finma, the Swiss regulator, said it instructed UBS to appoint an independent third party to report on the progress and completion of a program to fix these failings. The effectiveness of controls against unauthorized trading will also be checked by an auditor once the program is finished, Finma said.
Adoboli, a former trader in UBS’s London office, was sentenced to seven years in jail on Nov. 20 for fraud in relation to the loss, the largest from unauthorized trading in British history. About $2.1 billion of the loss arose from long positions in stock futures that peaked at $12.1 billion on Aug. 8, 2011, and were closed out three days later, while the remainder was incurred on short positions in stock futures that were entered afterward and peaked at $8.5 billion on Sept. 15, Finma said.
“UBS failed to question the increasing revenue of the desk and failed to ensure that there was a corresponding increase in the controls in place over the desk,” said Tracey McDermott, the FSA’s director of enforcement and financial crime. “As a result Adoboli, a relatively junior trader, was allowed to take vast and risky market positions, and UBS failed to manage the risks around that properly. We know from past experience that failures to manage risk properly can cause firms to fail and cause systemic harm.”
The exchange-traded-funds desk, where Adoboli, 32, was working, was generating most of its revenue through proprietary trading, Finma said in its report. Those revenues reached $63.7 million in the first half of 2011 compared with $11.7 million for all of 2010 and were not analyzed in detail, Finma said.
The desk’s supervisor and line manager were made aware of breaches in risk limits on at least four occasions between June and July 2011 and didn’t take any action in response, the report said. On one occasion, when Adoboli made clear that the desk made a profit of $6 million by taking intraday positions in excess of $200 million, or more than twice the limit, the supervisor initially congratulated the desk on the performance before reminding traders that his authorization was required to exceed risk limits.
“Front office managers showed lenience to traders and had little interest in controlling their activities,” Finma said in the report. “The emphasis on profits came at the expense of control and sound risk management.”
Immediately following the discovery of the loss last year Finma introduced measures to limit the operational risk exposure of UBS until the controls at its investment bank were working effectively.
As part of the measures, the investment bank must get the regulator’s consent for any new business initiative that is likely to increase operational complexity and was forbidden from undertaking any acquisitions. The unit and UBS’s London branch were also subjected to caps on their risk-weighted assets, the regulator said. Finma, based in Bern, is also examining whether UBS must increase capital backing for its operational risks, the Swiss regulator said.
UBS said in an e-mailed statement that it’s “pleased” that the investigation has been concluded and that regulators acknowledged the steps the Zurich-based bank has taken since the incident.
The bank said in May it completed remedial action to address control deficiencies identified in the aftermath of the unauthorized trading. UBS took disciplinary action against staff and strengthened internal risk controls, including the introduction of mandatory risk training for staff globally and a redesigned training for supervisors. Risk management was also added to employees’ performance objectives, UBS said on its website in September.
“We have been absolutely determined to learn from this incident,” Chief Executive Officer Sergio Ermotti said in a memo to employees before Adoboli’s trial started this September. “We have improved internal monitoring and controls to ensure that something like this does not recur, or if it does, to ensure that it is detected and dealt with swiftly.”
UBS said last month it will exit most of the capital- intensive fixed-income businesses at the investment bank to boost pretax return on equity to more than 15 percent starting next year.
UBS qualified for a 30 percent discount to the FSA’s fine, which would have totaled 42.4 million pounds, because it agreed to settle at an early stage, the regulator said. The bank also spent about 16 million pounds to date to engage an independent firm to investigate the trading incident, it said.
UBS’s disciplinary actions against employees included clawing back bonuses and withholding 50 percent of their deferred compensation from relevant individuals, totaling more than 34 million pounds, according to the FSA.
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