SFC reprimands and fines UBS AG $8 million for professional investor misclassification

The Securities and Futures Commission (SFC) has reprimanded and fined UBS AG (UBS) $8 million for deficiencies in its internal systems and controls, resulting in the firm’s failure to ensure accurate classification of professional investors (PIs) for over 12 years (Note 1).

The SFC’s investigation revealed that, between 2009 and July 2022 (Relevant Period), UBS verified its clients’ PI status by an automated process which was based upon the firm’s misinterpretation of the minimum portfolio requirement under the Securities and Futures (Professional Investor) Rules for certain types of joint client accounts (Note 2). 

As a result, UBS incorrectly classified certain joint accounts as PI accounts when in fact they ought to be classified as non-professional investors’ accounts (Non-PI Clients).  By doing so, UBS: 

• provided its securities pooled lending (SPL) service to some Non-PI Clients without obtaining valid standing authorities for the use of client securities or securities collateral or disclosing the relevant information in the monthly statements issued to them; and

• offered and sold investment products intended for PIs only (PI-Restricted Products) to some Non-PI Clients (Note 3).

A look-back review conducted by UBS covering the four-year period between July 2018 and July 2022 identified that a total of 560 joint accounts booked and/or managed in Hong Kong were misclassified as PI accounts.  The misclassified accounts included:

• 23 accounts that subscribed to the SPL service, involving 9,190 SPL transactions where securities listed or traded on The Stock Exchange of Hong Kong Limited were lent to UBS; and

• 94 accounts that conducted investment transactions in PI-Restricted Products, involving a total of 500 transactions.

The SFC considers that UBS failed to act with due skill, and care and establish effective systems and controls to ensure accurate classification of PIs and compliance with the applicable regulatory requirements (Note 4).

In deciding the sanction, the SFC has taken into account all relevant factors, including:

• the long duration of UBS’s failures lasting for over 12 years;

• the previous disciplinary action against UBS for failures of a similar nature (Note 5);

• the look-back review and remedial actions by UBS to strengthen its internal controls and systems upon identifying and self-reporting the breaches;

• UBS’s cooperation with the SFC in resolving the SFC’s concerns; and

• UBS will implement Enhanced Complaint Handling Procedures (ECHP) to review any complaints which may be made by clients potentially misclassified as a PI during the Relevant Period (Note 6).

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Notes:

1. UBS is registered under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities.

2. These issues were brought to the SFC’s attention by self-reports from UBS and referral of findings from the Hong Kong Monetary Authority. 

3. PI-Restricted Products include, among others, bonds listed under Chapter 37 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, accumulators, decumulators, and products with loss absorption features.    

4. Details of the relevant regulatory requirements are set out in the Statement of Disciplinary Action.

5. In August 2021, the SFC reprimanded and fined UBS $9.8 million for various regulatory breaches, including its failure to diligently supervise its client advisors and implement sufficient controls to ensure that its SPL service was subscribed by PIs only, which further resulted in its failure to comply with the Securities and Futures (Client Securities) Rules and the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules in relation to its SPL service provided to clients who were misclassified as PIs.  For details, please see the SFC’s press release dated 3 August 2021.

6. ECHP were designed to ensure that an intensive review is conducted by UBS into relevant transactions such that any applicable complaints to be made are resolved in a fair and reasonable manner.