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UBS faces fine and investor pay-outs over AIG fund failings

UBS has been fined £9.45 million and will pay out £10 million for failures relating to the sale of the AIG Enhanced Variable Rate fund.

 
UBS faces fine and investor pay-outs over AIG fund failings

UBS has been fined £9.45 million by the City watchdog for exposing customers invested in the AIG Enhanced Variable Rate fund to ‘unacceptable’ risk and mis-selling, and has agreed to pay £10 million in redress.

Between 1 December 2003 and 15 September 2008 UBS sold the fund to 1,998 high-net-worth customers who invested a total of £3.5 billion. The AIG fund then invested in financial and money market instruments, but unlike a standard money market fund aimed to deliver higher returns by investing the assets in riskier securities.

When the financial crisis hit the fund saw its assets tumble and investors rushed to withdraw their investments causing a run on the fund. The money in the fund was then frozen and AIG later on had to be bailed out by the US government. At this point 565 UBS customers had £816 million invested in the fund.

The Financial Services Authority (FSA) has reviewed 33 sales of the fund to customers and found 19 were mis-sold and a considerable risk that 12 of the remaining 14 sales have been mis-sold.

The regulator also assessed 11 complaints made to the banks by these customers and found that all 11 had been assessed unfairly, although six complaints had been upheld.

UBS has said it will set up a redress programme for customers who remained invested in the fund at the time of its suspension, at a cost of approximately £10 million, as well as paying the fine.

The UBS failings were:

  • Failing to carry out adequate due diligence on the fund before selling it to customers meaning UBS did not have an understanding of the fund
  • UBS advisers did not receive appropriate training about the fund so could not determine its suitability for customers
  • Customers were not provided with a record of why the fund was suitable for them
  • Customers were not told about the complex nature of the fund, instead being told it was a straightforward money market fund
  • Failing to responds in the 2007-08 crisis when concerns about the fund emerged meaning there was a risk of loss for customers
  • Failing to assess customer complaints about the funds
  • Failing to maintain adequate sales records of the fund

Tracey McDermott, director of enforcement and financial crime, said: ‘UBS’s conduct fell far short of what its customers deserved and what the FSA required. It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the fund came to the fore.’

A spokesman for UBS said:'We are pleased that we can put this issue that dates back to 2008 behind us, so that we can continue to focus on serving our clients and executing our strategy.'

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