Hong Kong’s Securities and Exchange Commission (SFC) reprimanded and fined UBS AG $8 million for deficiencies in its internal systems and controls, resulting in the firm’s failure to ensure accurate classification of professional investors (PI) for more than 12 years.
The SFC’s investigation revealed that, between 2009 and July 2022 (Relevant Period), UBS verified the PI status of its clients through an automated process based on the firm’s misinterpretation of the minimum portfolio requirement under the Securities and Futures (Professional Investor) Rules for certain types of joint client accounts.
As a result, UBS misclassified some joint accounts as PI accounts when in fact they should have been classified as Non-PI Clients.
In doing so, UBS:
- provided the pooled securities lending (SPL) service to certain non-PI Customers without obtaining valid standing authorities for the use of customer securities or securities collateral or disclosing the relevant information in the monthly statements issued to them; and
- offered and sold PI-only investment products (PI Restricted Products) to certain non-PI Customers.
A review conducted by UBS, covering the four-year period between July 2018 and July 2022, found that a total of 560 joint accounts held and/or managed in Hong Kong were misclassified as PI accounts.
Misclassified accounts included:
- 23 accounts registered with 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 made investment transactions in PI-Restricted Products, involving a total of 500 transactions.
The SFC concluded that UBS failed to act with due skill and care and to establish effective systems and controls to ensure the accurate classification of PIs and compliance with applicable regulatory requirements.
In making the sanction decision, the SFC took into account a number of factors, including the long duration of UBS’s failures spanning more than 12 years, as well as UBS’s cooperation with the SFC to resolve the SFC’s concerns.
UBS will implement the Enhanced Complaints Handling Procedures (ECHP) to consider any complaints that may be submitted by clients who may have been misclassified as a PI during the Relevant Period.