Third time unlucky for UBS

On Monday 26 November, the Financial Services Authority announced its latest settlement with Swiss bank UBS for £29.7m. This followed the conviction and imprisonment of UBS rogue trader Kweku Adoboli for fraud. Adoboli had run up losses of $2.3bn, although it is rumoured that at one stage the bank’s exposure was in the region of $12bn.

In the settlement, UBS accepted that it had breached FSA Principles 2 and 3 which focused on inadequate systems and controls at the bank and, in particular, failures to manage risk properly. The fine is the highest imposed for systems and controls failures and the third highest in FSA history.

In 2009 UBS was fined £8m by the FSA for systems and controls and risk management failures in its international wealth management business. Unsurprisingly, the FSA’s Final Notice identified this previous breach as a key aggravating feature of the current breach. Although the failures occurred in different parts of UBS’s business, the FSA was critical of the bank’s senior management for failing to address the issues identified in 2009 across the whole of its London office.

In terms of FSA fines, Barclays is the current holder of the yellow jersey with its fine of £59.5m following the Libor scandal. However, UBS is one of a number of banks being investigated over its involvement in Libor, which may result in a further UBS-FSA settlement shortly.

If any such settlement were to follow the Barclays’ settlement, not only would UBS be accepting a breach of FSA Principle 5 (misconduct) but also yet further breaches of Principles 2 and 3. UBS could find itself in the unprecedented position of facing its third FSA strike in as many years.

It is unclear how the FSA would approach such a position. Other than a requirement to consider a firm’s previous disciplinary history, there is no further guidance or legislative steer. One view is that the FSA could throw the book at UBS, by concluding that the three breaches reveal nothing less than a cultural and systemic disregard for the rules at the highest levels within the bank.

However, the FSA may have to adopt a more measured approach for two key reasons. Firstly, the sequence of the breaches is important - any Libor breaches are likely to date back to 2005-2008. The international wealth management breaches occurred in 2006 and 2007, but the Adoboli breaches are much later in 2011. UBS could argue that at the time any Libor breaches occurred UBS did not then have a poor disciplinary history and so there was no subsequent disregard for the rules.

Second, in the Adoboli Final Notice the FSA acknowledged that UBS had taken significant steps to address its systems and controls failings after the FSA ‘rogue trader review’ in 2008 and its 2009 settlement, albeit the steps taken were inadequate to deal with Adoboli’s activities.

But, however well it argues its corner, UBS may shortly find itself wearing Barclays’ yellow jersey.