UBS has been fined £9.45 million (around $14.75 million) for failures in the sale of the AIG Enhanced Variable Rate Fund. According to the Financial Services Authority, the UK regulator, these failures led to UBS customers being exposed to “an unacceptable risk of an unsuitable sale of the fund.”

The Swiss banking firm also failed to deal properly with complaints from customers about sales of the fund, the FSA said in a statement today.

Between 1 December 2003 and 15 September 2008 UBS sold the fund to 1,998 high net worth customers, with initial investments of approximately £3.5 billion. The fund invested in financial and money market instruments but, unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of its assets in asset backed securities and floating rate notes.

During the financial crisis of 2007 and 2008, the market values of some of the assets in the fund fell below their book values. Following Lehman Brothers’ application for Chapter 11 bankruptcy protection in the US there was a sharp fall in AIG's share price. This led to a run on the fund which, in turn, led to withdrawals being suspended. At that point 565 UBS customers had approximately £816 million invested in the fund, the FSA said.

In a review of sales of the fund to a sample of 33 customers, the FSA said it found that 19 were mis-sold and that there was a considerable risk that 12 of the remaining 14 may have been mis-sold. The FSA also reviewed 11 complaints made by these customers and found that all 11 had been assessed unfairly.

“UBS’s conduct fell far short of what its customers deserved and what the FSA requires. It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the fund came to the fore,” Tracey McDermott, director of enforcement and financial crime at the FSA, said in the statement.

A spokesperson for UBS told WealthBriefing, “We are pleased that we can put this issue that dates back to 2008 behind us, so that we can continue to focus on serving our clients and executing our strategy.”

UBS agreed to settle early entitling it to a 30 per cent discount on what would otherwise have been a £13.5 million penalty. In addition, UBS has agreed to conduct a redress programme for those customers who remained invested in the fund at the time of its suspension. It is estimated that compensation payable to customers will be around £10 million.