UBS Fined $1 Million for Misclassifying Professional Investors Over 12 Years

Key Takeaways

• UBS Fined $1 million (HK$8 million): The SFC sanctioned UBS AG for 12 years of misclassifying clients as professional investors due to flawed internal systems.
• 560 Accounts Affected: The errors led to unqualified clients accessing restricted investment products and participating in 9,190 securities lending transactions.
• Regulatory Breaches: UBS violated Hong Kong’s Client Securities Rules, Contract Notes Rules, and Code of Conduct by failing to ensure proper investor classification.
• Repeat Offense and Remediation: Following a prior fine in 2021, UBS has strengthened controls, self-reported the issue, and introduced enhanced complaint procedures.

Deep Dive

The Securities and Futures Commission (SFC) has reprimanded and fined UBS $1 million (HK$8 million) after uncovering a 12-year stretch of compliance failures tied to the bank’s misclassification of professional investors in Hong Kong. The regulator cited “deficiencies in internal systems and controls” that led to the inaccurate classification of hundreds of client accounts and improper access to restricted financial products.

The SFC’s investigation found that from 2009 to July 2022, UBS relied on an automated system that incorrectly interpreted the minimum portfolio requirement under Hong Kong’s Securities and Futures (Professional Investor) Rules. The error meant that certain joint accounts, particularly those held between non-associates or between parents and children, were automatically flagged as professional investor (PI) accounts, even when individual clients did not meet the HK$8 million threshold required to qualify.

As a result, UBS extended its securities pooled lending (SPL) service and sold PI-only investment products to clients who should have been classified as non-professional investors (Non-PI Clients). These clients did not receive the required disclosures or provide valid standing authorities for the use of their securities or collateral.

Scope and Impact

A look-back review conducted by UBS covering the four-year period between July 2018 and July 2022 identified 560 joint accounts that had been wrongly classified as PI accounts. Among them:

• 23 accounts subscribed to the SPL service, resulting in 9,190 transactions where securities were lent to UBS.
• 94 accounts conducted 500 transactions in PI-restricted products such as Chapter 37 bonds, accumulators, and products with loss absorption features.

Because of the misclassification, UBS relied on exemptions meant for professional investors and failed to meet disclosure and consent requirements under Hong Kong’s Client Securities Rules and Contract Notes and Statements of Account Rules.

The SFC determined that UBS breached multiple provisions of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, including obligations to act with due skill, care, and diligence and to maintain effective systems and controls. The regulator also noted violations of the Client Securities Rules and Contract Notes Rules.

In its disciplinary statement, the SFC described UBS’s oversight as “serious and long-running,” noting that the bank had previously been fined $1.25 million (HK$9.8 million) in 2021 for similar failures related to its SPL service.

Mitigating Factors and Remediation

In determining the penalty, the SFC considered several mitigating factors, including UBS’s self-reporting of the issue, its cooperation with the investigation, and the remedial measures taken to strengthen internal controls. The bank has launched a comprehensive review of its systems and will implement Enhanced Complaint Handling Procedures (ECHP) to address potential client complaints arising from the misclassification.

The enforcement action underscores the SFC’s continued focus on investor protection and the accuracy of professional investor classifications, a cornerstone of Hong Kong’s financial regulatory framework. It also highlights the compliance risks of over-reliance on automated systems without sufficient human oversight, especially where regulatory interpretation is involved.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.