Chinese Regulators Are Serious About Investor Protection

• Chinese Regulators Sanctioned UBS for Investment Fraud
• UBS Overcharged Its Chinese Customers
• China is Serious About Investor Protection

The Chinese Securities and Futures Commission, or SFC, has reprimanded and fined UBS $51 million for overcharging up to 5,000 clients for over a decade, according to a report from Reuters.

The SFC said its investigation exposed “serious systemic internal control failures” at the bank. UBS had failed to disclose conflicts of interests and had overcharged some clients in “opaque” trades, it said.

The bank was essentially adding extra fees and padding out the spreads on bond and structured-note trades.

These are some of the most serious charges a bank and wealth manager can face.

The overcharging affected 5,000 Hong Kong managed client accounts in about 28,700 transactions. Not only did UBS pay a fine they also agreed to reimburse the clients $25 million.

The SFC reported that UBS “not only failed to observe the fundamental and overarching duty to act in its client’s best interest but also abused the trust of unsuspecting clients by failing to disclose conflicts of interest and overcharging them in opaque trades,” according to a statement by the SFC.

The SFC’s CEO announced that “the SFC expects all intermediaries to uphold high standards of integrity while managing trades for their clients.  UBS fell far short of these expectations by systemically overcharging a very large number of clients over many years,” according to the statement. “Although each overcharge represents a fraction of each trade, UBS’s misconduct involved deception and a pervasive abuse of trust resulting in significant additional revenue for UBS to which it was not entitled.”

Further, the China Banking and Insurance Regulatory Commission recently issued new rules for “structured deposit products” in which China’s commercial banks transacted $1.5 trillion of business, according to the Chinese business website, Caixin Global.

“Commercial banks must have derivatives trading licenses to offer structured products and the sale of such products must follow rules for wealth management products,” according to Caixin Global.

Structured deposit products have gained popularity in China since 2018 as regulators tightened controls on banks’ sales of wealth management products forcing banks to seek alternative sources of funding.

The Commission stated that they were requiring banks to review investors’ risk tolerance and clearly inform them about potential risks of structured deposit products.

UBS is under fire in the U.S. for selling its “Yield Enhancement Strategy” (YES) complex and risky options strategy according to a recent Wall Street Journal report.

UBS Faces Client Backlash Over Options Strategy

The U.S. could learn a thing or two from China!