UBS exposed customers to an "unacceptable risk" through its "unsuitable sale" of the AIG Enhanced Variable Rate Fund between December 1 2003 and September 15 2008, FSA officials said. Customers affected can now expect about £10m in compensation, the regulator said in an announcement on Tuesday.
"The fund invested in financial and money market instruments but, unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of the Fund’s assets in asset backed securities and floating rate notes," said the FSA.
The fund was sold to 1,998 high net worth individuals, with initial investments totalling about £3.5bn. The FSA said the bank failed to make clear that a significant proportion of the fund was invested in securitisations and assets other than the bank deposits, commercial paper and other money market instruments it said it invested in.
The fund’s problems stemmed from Lehman Brothers filing for US bankruptcy protection in September 2008. AIG’s share price dropped sharply on the back of that move, prompting investors to pull out of the fund. The subsequent run on the fund led to its suspension, with some 565 customers holding 618 policies blocked from immediately withdrawing all of their cash, which totalled about £816m.
The FSA also claimed that the bank failed to carry out adequate due diligence on the fund before marketing it to customers; failed to maintain adequate sales records, including whether the fund was marketed on an advised, discretionary or non-advised basis; and did not review past sales to ensure they were suitable, nor ensure that sales advisers fairly and accurately explained risks to customers.
"UBS’s conduct fell far short of what its customers deserved and what the FSA requires," Tracey McDermott, director of enforcement and financial crime, said in Tuesday’s statement. "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."
UBS did not return a call seeking comment on the matter.