The Securities and Futures Commission (SFC) of Hong Kong has 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 (PIs) for over 12 years.
The SFC’s investigation revealed that, between 2009 and July 2022 (Relevant Period), UBS verified its clients’ PI status by an automated process which was based upon 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 incorrectly classified certain joint accounts as PI accounts when in fact they ought to be classified as non-professional investors’ accounts (Non-PI Clients).
By doing so, UBS:
- provided its securities pooled lending (SPL) service to some Non-PI Clients without obtaining valid standing authorities for the use of client securities or securities collateral or disclosing the relevant information in the monthly statements issued to them; and
- offered and sold investment products intended for PIs only (PI-Restricted Products) to some Non-PI Clients.
A look-back review conducted by UBS covering the four-year period between July 2018 and July 2022 identified that a total of 560 joint accounts booked and/or managed in Hong Kong were misclassified as PI accounts.
The misclassified accounts included:
- 23 accounts that subscribed to 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 conducted 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 establish effective systems and controls to ensure accurate classification of PIs and compliance with the applicable regulatory requirements.
In deciding the sanction, the SFC has taken into account a variety of factors, including the long duration of UBS’s failures lasting for over 12 years, as well as UBS’s cooperation with the SFC in resolving the SFC’s concerns.
UBS will implement Enhanced Complaint Handling Procedures (ECHP) to review any complaints which may be made by clients potentially misclassified as a PI during the Relevant Period.
