The Financial Services Authority (FSA) has fined UBS $47.6 million for systems and controls failures that allowed an employee to cause $2.3 billion in losses as a result of unauthorized trading.

The trader, Kweku Adoboli, has been convicted of two counts of fraud by abuse of position and sentenced to seven years’ imprisonment.

The FSA said the systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls.

“UBS’s systems and controls were seriously defective,” said FSA enforcement director Tracey McDermott. “UBS failed to question the increasing revenue of the desk and failed to ensure that there was a corresponding increase in the controls in place over the desk. As a result Adoboli, a relatively junior trader, was allowed to take vast and risky market positions, and UBS failed to manage the risks around that properly. We know from past experience that failures to manage risk properly can cause firms to fail and cause systemic harm.”

“Failures of this type in firms of the size and standing of UBS not only damage the firms concerned but also wider confidence in the integrity of the markets and the financial system. It is imperative that the markets we regulate are seen by investors to be orderly and a safe place to do business.”

“This penalty – fixed at 15% of the revenue of the GSE trading division – is intended to make it clear that the FSA expects much higher standards from the firms we regulate.”

In setting the level of the penalty, the FSA took into account the revenue generated by the business area where the poor controls occurred.

It also took into account the fact that in November 2009, UBS was fined $12.8 million for failings in relation to the systems and controls around the international wealth management business conducted with non-UK resident clients in the London branch of UBS.

The FSA expects firms to consider whether the issues identified in an enforcement action are applicable to other business areas and whether remedial action is necessary, UBS failed to do this.

UBS agreed to settle at an early stage and therefore qualified for a 30 percent discount under the FSA’s executive settlement procedures. Were it not for this discount, the fine would have been $67.9 million.

UBS agreed to engage an independent firm to conduct a substantive investigation into the unauthorized trading incident, expending considerable resources – approximately $20.7 million to date – in doing so. UBS’s new senior management has committed significant resources to undertake an extensive program of remediation.

UBS has taken disciplinary action against employees who were involved in the events which gave rise to these breaches, including clawing back bonuses and withholding 50 percent of their deferred compensation from relevant individuals totaling more than $54.45 million.

On September 14, 2011, UBS became aware that unauthorized trading had been carried out between June 1, 2011 and September 14, 2011 on the Exchange Traded Funds Desk in the Global Synthetic Equities trading division conducted from the London Branch of UBS.

The losses were incurred primarily on exchange traded index future positions.

The underlying positions were disguised by the use of late bookings of real trades, booking fictitious trades to internal accounts and the use of fictitious deferred settlement trades.

The FSA alleged that during the trading period, there was insufficient focus on the key risks associated with unauthorized trading within the GSE business conducted from the London Branch.

The significant control breakdowns allowed the trading to remain undetected for an extended period of time.

The FSA alleged that UBS failed to take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems and failed to conduct its business from the London Branch with due skill, care and diligence.

The FSA alleged that the UBS computerized system operated by UBS to assist in risk management was not effective in controlling the risk of unauthorized trading.

The FSA also alleged that the trade capture and processing system had significant deficiencies, which Adoboli exploited in order to conceal his unauthorized trading.

The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems.

The FSA alleged that the Exchange Traded Funds Desk breached the risk limits set for their desk without being disciplined for doing so.

These limits represented a key control and defined the maximum level of risk that the Desk could enter into at a given time.

This created a situation in which risk taking was not actively discouraged or penalized by those with supervisory responsibility.

UBS also allegedly failed to investigate the underlying reasons for the substantial increase in profitability of the trading desk despite the fact that this could not be explained by reference to the end of day risk positions.