The Hong Kong Securities and Futures Commission (SFC) has levied an $8 million penalty against UBS AG for serious lapses in its internal systems and controls, which led to the improper classification of professional investors (PIs) for over 12 years.
An investigation by the SFC uncovered that UBS employed an automated process to verify its clients’ PI status from 2009 through July 2022. However, this process was based on a flawed understanding of the minimum portfolio prerequisites outlined in the Securities and Futures (Professional Investor) Rules, particularly concerning certain types of joint accounts.
As a consequence, UBS misclassified a number of joint accounts as PI accounts, despite many of them actually qualifying as accounts belonging to non-professional investors (Non-PI Clients). This misclassification resulted in serious breaches, including:
– Provision of securities pooled lending (SPL) services to several Non-PI Clients without securing valid standing authorities for the use of client securities or securities collateral, nor informing them adequately through monthly statements.
– The offering and sale of investment products specifically designated for PIs (referred to as PI-Restricted Products) to Non-PI Clients.
A retrospective review conducted by UBS over a four-year period from July 2018 to July 2022 identified 560 joint accounts that had been incorrectly classified as PI accounts. These misclassified accounts included:
– 23 accounts that utilized the SPL service, which saw 9,190 SPL transactions involving securities listed or traded on The Stock Exchange of Hong Kong Limited being lent to UBS.
– 94 accounts that engaged in transactions involving PI-Restricted Products, constituting around 500 separate transactions.
The SFC concluded that UBS failed to adequately exercise due skill and care, as well as to establish effective systems and controls for accurately classifying PIs and for adhering to regulatory requirements.
In determining the sanction, various factors were considered, such as the prolonged duration of the misconduct—which persisted for more than 12 years—and UBS’s cooperative behavior in addressing the SFC’s concerns.
To rectify the situation and improve compliance going forward, UBS is set to implement Enhanced Complaint Handling Procedures (ECHP), specifically aimed at reviewing any complaints from clients who may have been misclassified as PIs during the investigation period.