A close reading of the UK Upper Tribunal’s recent decision on an appeal by a former UBS employee reveals the possibility of a volte-face by several clients on their initial positions, putting their dealers and advisers (UBS employees) in trouble.
While one of them, Mr X, the beneficial owner of the so-called Customer A account, took the extreme step of disowning his account in front of regulators, several others have been found less than consistent in their dealings. Ex-UBS employees, including former Managing Director Sachin Karpe, are accused of unauthorised transactions on 39 client accounts, of which 21 reported substantial losses.
However, not all of these may have been genuinely unauthorised. The tribunal acknowledges some of these investors could have jumped on to the “remediation bandwagon” after realising they were going to get monetary compensation. UBS paid $42 million as compensation to clients affected by the so-called unauthorised transactions. The compensation amount is likely to have been much higher than actual losses due to a calculation method followed by consultancy firm Deloitte. According to the Deloitte method, all trades were assumed to be unauthorised unless written instructions were found showing the contrary.
| AUTHORISED OR NOT? |
| * In November 2009, FSA fined UBS for systems and controls failures |
| * FSA said these failures enabled employees to carry out unauthorised transactions |
| * Unauthorised transactions done on at least 39 accounts |
| * 21 of these accounts made losses, UBS paid $42 million in compensation |
| * Tribunal says some of these unauthorised trades could actually be authorised |
| Source: FSA orders, UK Upper Tribunal order |
However, under UBS compliance rules in place at that time it was not compulsory to have written instructions for making these trades; even a telephonic instruction would suffice. Therefore, when Deloitte’s method was applied uniformly across all trades, technically most trades became “unauthorised”. But, the tribunal acknowledged a number of these “unauthorised trades” may really have been authorised, meaning that clients chose to disown trades at their convenience.
The tribunal order quoting submissions from UBS staff said the UK regulator, FSA, had not established the extent to which the so-called “unauthorised trades” were unauthorised. “The FSA cannot rely on the absence of documentation recording client instructions because, as regards trades put to the trading desk, UBS’s systems and controls allowed these to be carried out without client instructions having to be recorded at that particular point. Not all the clients had, it was observed, provided reliable accounts of their trading relationships with UBS.
Moreover, the Deloitte remediation exercise proceeded on the presumption that all the trades were unauthorised unless documentation could be produced to demonstrate the contrary. For those, among other reasons, the 'losses' to the clients resulting from unauthorised transactions and transfers of cash should be regarded as considerably less than the $42 million paid by UBS as compensation to the affected clients,” the tribunal said quoting Karpe’s submissions.
The market conditions that prevailed during this period also accentuated the claims from clients.
According to people familiar with the UBS case, the collapse of the markets in early 2008 and the losses suffered by these clients also pushed more clients to turn hostile. “The markets in January-February 2008 started collapsing and several clients lost significant amounts of money. Once the clients realised there was a problem in 2008 at the bank, some of them started disowning the trades that actually belonged to them,” a financial services industry professional said.
Clients of UBS Wealth Management were wealthy individuals, several of whom were active and sophisticated traders who used to trade extensively with other banks, too.
According to FSA findings and accounts of people familiar with the functioning of the bank, UBS systems and controls allowed trades to be placed without written client instructions. The systems allowed for accepting telephonic instructions from clients.
However, UBS, London, allegedly did not have systems until 2007 for the recording of telephonic lines beyond three months. This allowed clients to question their trades, as there was no system of verification of deals in dispute.
Also, according to Karpe’s submissions, the UBS desk carried out “quasi-discretionary trading" for clients. Under this service, some clients wanted the UBS staff to trade/invest. However, the clients had a general idea of their trades, as they did not like to be contacted frequently on the telephone. Under this arrangement, which was available for forex trades and structured products, clients would visit the bank once a quarter and check their statements, which gave them a fair idea of the activity.
However, the tribunal concluded that “there was no such procedure as “quasi-discretionary trading” as had been alleged by Karpe in his written reply. UBS’s product offering did not extend to discretionary trading in forex. UBS did offer the option of providing advice and execution-only services for forex, but none of the affected customers had selected this option.
In an email response, a UBS spokesperson declined to comment on individual client accounts but said, “UBS takes its legal and compliance responsibilities and obligations very seriously and seeks to ensure that they are upheld within UBS at all levels.”
The bank in its statement also came down heavily on its former employees, who it said were in clear breach of UBS policies and procedures and that they were dismissed by the bank for gross misconduct. “UBS has fully cooperated with the regulatory action taken by the FSA against them and notes the decisions of the Upper Tribunal to uphold that action. We are satisfied with the outcome and that this matter is now closed,” the spokesperson said. Karpe declined to comment for this story. An email sent to FSA through its website did not elicit any response. Disputing loss-making trades is not new, even in India. Several Indian banks have faced complaints from customers, including companies, disputing the authorisation of trades and refusing to bear losses on them.
This is the concluding instalment of a three-part series.
