A probe initiated jointly by Swiss and British regulators found that the Indian outsourcing unit of the global banking giant UBS, failed in putting control for detecting suspicious trading activity. A loss of around $2.3 billion was found out in this probe, which has again thrown doubt over the outsourcing of critical functions in global banks to Indian outsourcing units.
Financial Services Authority (FSA) of U.K. and Swiss regulator FINMA (Financial Market Supervisory Authority) had embarked on the probe in September 2011 when it was exposed that a London-based trader of UBS had caused considerable losses amounting to $2.3 billion( roughly Rs. 13,000 crore) by conducting unauthorized trade on Exchange Traded Fund desk of the bank.
As a result of the probe and its subsequent findings, FSA imposed a fine of £29.7 million (roughly Rs. 265 crore) on the Swiss banking major on account of failing in preventing such a large-scale unauthorized trading on its turf. FINMA gave a whiplash to the bank by stating that there were serious flaws in the bank’s system, with it suffering from severe deficiencies in risk management. It also said that several major control failures were also found at the UBS bank.
Observations from the probe
- A rogue London-based trader of global bank UBS caused a $2.3 billion loss with its key controls failing at its Indian outsourcing unit.
- Large-scale unauthorized trading took place due to the bank’s ineffectiveness to control it.
- The back operations team at UBS is responsible for confirming deferred-settlement trades. The ‘T+14’ report, which is a specific report prepared by the outsourcing unit in India, helps the operations team identify these trades. The report proved to be ineffective.
- Supervisory Control Portal (SCP) is the bank’s system for supervising online trade conducted by the bank. Both the SCP and the‘T+14 report’ are the key controls which help in detecting suspicious trading activity. In this case, both were proved to be hugely ineffective.
There were two other instances before UBS, when two major British banks, HSBC and Standard Chartered had come under the scanner of foreign regulators for their ineffective controls in preventing suspicious trading. Both the inquiries happened when key oversight jobs of the banks were outsourced to India.
Following the scandal which came to light in September 2011, UBS had announced that it would undertake measures to minimize risk exposure caused due to the scandal. In June 2012, they announced that the weaknesses which allowed the unauthorized trading to take place, have been resolved based on the internal investigation they conducted. Now they are planning to seek the help of their auditors Ernst & Young in setting up proper internal control of financial reporting to avoid such fraudulent trading.