Kweku Adoboli, the ex-UBS employee accused of rogue trading, could claim UBS “lacks a clear risk management structure” as part of his defence, says a senior legal source close to the Swiss bank.
However, regulators, following an investigation, would first need to confirm this is the case and Adoboli would have to plead not guilty to the charges.
“Firstly, relating to the previous UBS fine in 2009 which followed an investigation of the bank’s systems and controls, it took two years for investigations to transpire and resulted in a fine of £8 million from events which took place in 2006 and 2007,” reveals the high-level source to Euromoney.
“It takes time to conduct these investigations, so we could see the results of this year’s major investigation in the next calendar year, which always follows extraordinary cases like these. I don’t know what the trader will do, but he has to decide ultimately whether he fights the case or accepts the charges. If he claims he didn’t do what has been alleged against him, it might be relevant to his defence that there was no clear guidance or rules [in the risk management system and structure].”
Before the sub-prime crisis, UBS thrived for decades on the back of its strong track record in risk management. This was particularly important for its market-leading private banking and wealth management division.
However, that reputation was quickly lost as the extent of UBS’s losses across its main divisions were revealed in 2007 and 2008. UBS admitted to structural failings in risk management throughout its business in a report requested in April 2008 by the Swiss Federal Banking Commission.
In November 2009, the UK’s Financial Services Authority fined UBS £8 million “for systems and controls failures that enabled employees to carry out unauthorised transactions involving customer money on at least 39 accounts”.
The regulator said that “the unauthorised activity, which took place between January 2006 and December 2007 at UBS's London-based wealth management business, only came to light when a whistleblower raised concerns internally”, and revealed that UBS had failed to manage and control the key risks, and the level of risk, created by its international wealth management business model; implement effective remedial measures in response to several warning signs that suggested the business's systems and controls were inadequate; and provide an appropriate level of supervision over customer-facing employees.
In September, UBS revealed that Adoboli, a London-based trader at the Swiss investment bank, accumulated around $2.3 billion-worth of losses through unauthorized trading, wiping out most of the cost-reduction measure the firm had planned three weeks earlier. In a statement, it announced it would cut 3,500 jobs as part of a cost-cutting programme to save around SFr2 billion, or around $2.3 billion.
Meanwhile, Euromoney exclusively revealed that UBS’s operational risk management unit had installed a database of case studies of loss events. The database holds information on other major unauthorised trading events, such as Barings and Societe Generale’s own scandals, to help UBS identify rogue trading for themselves.
Euromoney also revealed that Adoboli allegedly exploited the exchange-traded-fund (ETF) settlement loophole, which in turn revealed the systemic risk unease in the exotic ETF lobby.
UBS has an unfortunate risk management track record, especially during the credit crisis, so it will be interesting to see the outcome of the investigation to see if it did or did not adhere to the strictest standards of risk control and demand independent confirmation of trades.