FINAL NOTICE


1.
ACTION

1.1.
For the reasons given in this Notice, the FSA hereby imposes on UBS AG (UBS) a
financial penalty of £9.45 million.

1.2.
UBS agreed to settle at an early stage of the FSA’s investigation. UBS therefore
qualified for a 30% (Stage 1) discount under the FSA’s executive settlement
procedures. Were it not for this discount, the FSA would have imposed a financial
penalty of £13.5 million on UBS.

2.
SUMMARY OF REASONS

2.1.
The penalty is in respect of UBS’ failure to comply with Principle 9 and Principle 6
and certain rules set out in the FSA Handbook in connection with its sale of the AIG
Life Premier Access Bond, Enhanced Variable Rate Fund (the Fund) between 1
December 2003 and 15 September 2008 (the Sales Period) and its handling of related
complaints between 15 September 2008 and 20 September 2011.

2.2.
In selling the Fund, UBS failed to take reasonable care to ensure the suitability of its
advice to its customers to invest in the Fund (in breach of Principle 9), and also failed
to pay due regard to the interests of its customers and treat them fairly (in breach of
Principle 6). Further, when customers complained to UBS that they should not have
been sold the Fund, UBS failed to assess these complaints fairly (in breach of
Principle 6 and DISP 1.4.1R(2)).

2.3.
In particular, UBS:

(1)
failed to conduct adequate due diligence on the Fund before selling it to
customers. As a result, UBS had insufficient understanding of the nature of the
assets in the Fund and the consequent risks associated with it. Furthermore,
between January 2004 and August 2007, UBS failed to monitor effectively the
asset composition of the Fund;

(2)
failed to have an adequate sales process in place for the Fund. UBS’ advisers
were not provided with adequate training on the Fund and its features and
risks. As a result, UBS did not ensure that advisers understood the risks of the
Fund and could determine correctly whether the Fund was suitable for their
customers;

(3)
did not adequately capture customers’ tolerance to risk in relation to the
liquidity element of their portfolios with UBS, as well as customers’ risk
tolerance for their portfolios as a whole as part of the sales process of the Fund,
and failed to ensure that annual reviews of customers’ risk profiles and
portfolios were performed;

(4)
recommended the Fund to some customers even though it did not provide them
with the level of capital security they appear to have required. UBS did not
send suitability reports to customers to whom it sold the Fund. This meant that
customers did not receive a written explanation of why the Fund was suitable
for them taking into consideration their circumstances and investment
objectives, including any competing objectives, or an explanation of the trade-
off between the Fund’s risks and returns. Further, there was no compliance
monitoring review of any of the 1,998 sales of the Fund which could have
rectified this failing;

(5)
indicated to customers that the Fund was a cash fund which invested in money
market instruments. However, a significant proportion of the Fund was
invested in assets which did not meet this description and customers may have
misunderstood the true position about the risks they were assuming;

(6)
failed to respond appropriately during the financial crisis in 2007 and 2008
when it had concerns regarding the sale of the Fund and also realised there was
a greater risk of the Fund suspending redemptions and of customers suffering a
loss. In the third quarter of 2007, UBS took steps to improve its knowledge of
the types of assets within the Fund and the risks associated with the Fund.
Nevertheless, UBS failed to take appropriate action to address its concerns and
the way in which it continued to sell the Fund. UBS also failed to ensure that
advisers who sought to reassure existing customers inquiring about their
investments in the Fund provided a fair and accurate explanation of the risks.
Further, UBS failed to review its past sales of the Fund to ensure that these had
been suitable for customers;

(7)
despite conducting a thorough investigation of customer complaints relating to
its sale of the Fund, failed to assess those complaints fairly; and

(8)
failed to maintain adequate records of its sales of the Fund.

2.4.
As a consequence of the above failings, UBS’ customers were exposed to an
unacceptable risk of an unsuitable sale of the Fund and were not treated fairly. At the
time of the Fund’s suspension on 15 September 2008, 565 UBS customers holding
618 policies had approximately £816 million invested in the Fund. Of these, 119
customers had complained by September 2011.

2.5.
The FSA reviewed sales of the Fund made by UBS to 33 of its customers. It found
that 19 of those 33 customers were mis-sold the Fund and that there was a
considerable risk that 12 of the remaining 14 may have been mis-sold the Fund (albeit
that customer contact would be required to determine whether those sales were
actually unsuitable). The FSA also reviewed complaints made by 11 customers who
had been sold the Fund and found that all 11 complaints had been assessed unfairly,
albeit that six had been upheld by UBS.

2.6.
Following discussions with the FSA, UBS has agreed to conduct a redress programme
in relation to sales of the Fund to its customers who remained invested at the time of
the Fund’s suspension on 15 September 2008. It is estimated that compensation
payable to customers will be in the region of £10 million.

3.
DEFINITIONS

3.1.
The following definitions are used in this Final Notice:

“the Act” means the Financial Services and Markets Act 2000;

“advisers” means UBS’ customer advisers;

“AIG” means AIG Inc;

“ALICO” means American Life Insurance Company;

“the Complaints Period” means 15 September 2008 to 20 September 2011;

“COB” means the Conduct of Business part of the FSA Handbook;

“COBS” means the Conduct of Business Sourcebook which is part of the FSA
Handbook;

“DEPP” means the Decision Procedure and Penalties manual which is part of the FSA
Handbook;

“DISP” means the Dispute Resolution: Complaints part of the FSA Handbook;

“ENF” means the Enforcement manual which is part of the FSA Handbook;

“the FSA” means the Financial Services Authority;

“the FSA Handbook” means the FSA’s handbook of rules and guidance;

“Fund” means the AIG Life Premier Access Bond, Enhanced Variable Rate Fund;

“PAB” means the AIG Life Premier Access Bond, which includes both the Fund and
the SVRF;

“the Principles” means the FSA’s Principles for Businesses;

“the Relevant Period” means 20 October 2003 to 20 September 2011;

“the Sales Period” means 1 December 2003 to 15 September 2008;

“SVRF” means the AIG Life Premier Access Bond, Standard Variable Rate Fund,
which is part of the PAB;

“SYSC” means the Senior Management Arrangements Systems and Controls
Sourcebook which is part of the FSA Handbook;

“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);

“UBS” means UBS AG.

4.
FACTS AND MATTERS

4.1.
UBS offers investment banking, asset management and wealth management services.
It has been authorised by the FSA since 1 December 2001 to perform a number of
regulated activities, including advising on investments and arranging deals in
investments.

4.2.
UBS’ wealth management division provides high net worth individuals with a range
of investment products and services. The wealth management division of UBS’
London branch started selling the Fund to its customers in December 2003. The Fund
was recommended to UBS’ customers in an advised sales process.

4.3.
The AIG Premier Access Bond (PAB) was a single premium life assurance bond
containing a range of unit-linked funds invested in financial and money market
instruments. The PAB was marketed to high net worth individuals by several wealth
management firms and advisers, including UBS, as distributor.

4.4.
The product provider of the PAB was American Life Insurance Company (ALICO), a
UK branch of a wholly-owned subsidiary of AIG. AIG was, and remains, one of the
world’s largest international insurance and financial services organisations and was
AAA rated from 2003 and AA rated from 2005 until its downgrade to A on 15
September 2008.

4.5.
ALICO’s UK insurance business was ring fenced from its other liabilities through a
separate account. The assets invested within the PAB could not, therefore, be the
subject of attachment by creditors in the event that ALICO became insolvent. As the

Fund was held within an insurance bond, a customer’s investment was also subject to
the Financial Services Compensation Scheme, which covered 100% of the first
£2,000, plus 90% of the balance (with no upper limit) in the event ALICO defaulted.

4.6.
During the Sales Period the PAB included two variable rate funds, namely the Fund
and the Standard Variable Rate Fund (SVRF). The SVRF was invested in certificates
of deposit and bank deposits rated AAA and AA with terms to maturity of up to six
months. By contrast, the Fund was invested in certificates of deposit and bank
deposits as well as debt instruments such as floating rate notes, commercial
paper/bonds and asset backed securities rated AAA, AA and A and with terms to
maturity of up to five years. The Fund sought to provide a higher rate of return
compared with the SVRF and was accordingly invested in some longer term and
higher risk assets.

The Fund

4.7.
Although the Fund was invested in some money market instruments, the Fund was not
a typical money market fund because it sought to deliver an enhanced return by also
investing a material proportion of the Fund’s assets in:

(1)
asset backed securities. These comprised on average 27% of the Fund’s assets
between 6 July 2005 and 28 December 2007 and reduced to between 23% and
15% in the period 1 February 2008 to 8 August 2008, varying over the Sales
Period between approximately 31% and 14%. They were primarily backed by
UK residential and commercial mortgages with exposure at certain times to
non-conforming UK residential mortgages;

(2)
floating rate notes. Floating rate notes comprised on average 38% of the
Fund’s assets between 6 July 2005 and 28 December 2007 and reduced to
between 30% and 27% in the period 1 February 2008 to 8 August 2008,
varying over the Sales Period between approximately 51% and 27%; and

(3)
assets which had terms to maturity of between three and five years. These
comprised on average 54% of the Fund’s assets between 6 July 2005 and 28
December 2007 and reduced to between 41% and 15% in the period 1
February 2008 to 8 August 2008, varying between approximately 65% and
15% of the Fund’s assets.

4.8.
The Fund’s investment strategy was to smooth out fluctuations in the market value of
its assets so that it achieved steady, increasing returns for customers which were better
than the returns available on a typical bank deposit account. Customers purchased
units in the Fund which had a value assigned to them by ALICO. ALICO determined
the value of the units by reference to the book value of the Fund’s underlying assets,
rather than their market value. This was because it was intended that the underlying
assets would be held by the Fund to their maturity periods of between one day and
five years. However, if necessary, the longer dated assets could also be sold on the
secondary market prior to maturity for a price which depended upon market
conditions. In uncertain or turbulent economic times, there was a potential that these
assets could only be sold at a loss which would, in turn, affect the likelihood of
investors receiving the full amount of their investment.

4.9.
To meet ordinary levels of withdrawal requests, the Fund held a proportion of its
assets in cash or near cash products (overnight cash or on very short term deposit).
ALICO quoted variable annual rates of return for the Fund on an approximately one
month basis.

4.10. The Fund was designed to be tax efficient; there was no personal liability to lower or
basic rate income tax or capital gains tax because ALICO accounted for tax liabilities
on the underlying funds. Higher rate tax payers were only liable to pay additional tax
on any gains over the amounts invested when they withdrew more than 5% in any
policy year.

Suspension of the Fund on 15 September 2008

4.11. During the financial crisis of 2007 and 2008, the market values of some of the assets
in the Fund fell below their book values. There was also adverse press about the
financial stability of ALICO’s parent company, AIG. This, together with volatile
market conditions, prompted concerns on the part of distributors of the Fund including
UBS. From the third quarter of 2007, in view of the then market conditions, ALICO
began to increase the liquidity of the Fund, including by decreasing the proportion of
asset backed securities in the Fund and increasing the proportion of overnight cash.

4.12. On 15 September 2008, the day of Lehman Brothers’ application for Chapter 11
bankruptcy protection in the US and a sudden drop in AIG’s share price, a large
number of investors sought to withdraw their investments and there was a run on the
Fund. ALICO was unable to meet all withdrawal requests immediately. It established
that it could not meet the requests without having to sell some of its longer dated
assets for materially less than their book value, which would have given rise to a
significant drop in the accrued value of customers’ investments. ALICO suspended
withdrawals (which the terms and conditions of the Fund allowed) and ultimately
closed the Fund to new customers.

4.13. Existing customers were subsequently permitted to withdraw 50% of their investment
(comprising capital plus accrued interest), realising its full accrued value. However,
from 14 December 2008, they were able to withdraw the remaining 50% but not for its
full value (as at 14 December 2008, this represented a 13.5% reduction in the accrued
value of their entire investment). Alternatively, ALICO offered a guarantee that
customers would get back this proportion of their investment in full, based on its
value as at 14 December 2008, if they kept their money in a Protected Recovery Fund
(which ALICO established) until at least 1 July 2012. On 1 July 2012, the Protected
Recovery Fund was closed and customers were able to recover the value as at 14
December 2008 of the remaining 50% of their original investment into the Fund.

Impact on UBS’ customers

4.14. At the time of the Fund’s suspension on 15 September 2008, 565 UBS customers had
approximately £816 million invested in the Fund.

4.15. 15 customers withdrew either all, or over 50%, of their investment in December 2008
and suffered a loss of approximately 27% of the accrued value of the withdrawn
amount which exceeded 50% of their investment.

7

4.16. All of the remaining 550 customers elected to withdraw 50% of their investment
(realising its full value) and to transfer all of the remaining 50% of their investment to
ALICO’s Protected Recovery Fund. On 1 July 2012, and taking into account
distributions made from that Fund, customers who transferred all of the remaining
50% of their investment into the Protected Recovery Fund recovered 100% of the
accrued value of their original investment as at 14 December 2008. However, they
had lost the opportunity to earn an investment return on this proportion of their
investment since that date.

Failings in selling the Fund to customers

Failure to carry out adequate due diligence

4.17. Before UBS made the Fund available for sale to its customers in December 2003, it
failed to conduct adequate due diligence on the Fund. This appears to have been
because the Fund was introduced by ALICO as an additional fund to the SVRF, a
product within the PAB, which UBS had been selling since October 2000 and which
had been through due diligence and UBS’ formal new business approval process
before it was launched.

4.18. The Fund shared some common features with the SVRF. However, as the Fund’s
objectives and asset profile were different from the SVRF, it should have been
subjected to additional due diligence. UBS failed to undertake adequate due diligence
and, consequently, UBS did not take the appropriate steps to understand the nature of
the Fund’s underlying assets or its features and risks, including how changes in market
conditions might affect the Fund.

4.19. Shortly after the Fund was launched, one member of senior management requested
and received from ALICO details of the Fund’s underlying assets. This information
included the asset types, counterparties, ratings and size of holdings of the Fund (a
summary of which was already available to UBS). In providing this, ALICO stated
that the Fund was “expanding quite rapidly …so any snapshot at the moment might
not be representative of the long term structure”. This information was cascaded to
several individuals within UBS, but it is not clear what analysis (if any) was carried
out in relation to this data. In any event, UBS did not obtain details from ALICO of
plans for the “long term structure” and asset composition of the Fund.

Classification of the Fund as a “cash/liquidity” product which was low risk

4.20. UBS classified the Fund as a low risk product within its “cash/liquidity” asset class.
Other products within this asset class included current accounts, notice/deposit
accounts, money market funds and the SVRF.

4.21. During the Sales Period, there were no formal criteria or process used by UBS to
determine (a) which products should be allocated to the “cash/liquidity” asset class;
and (b) the risk profile of particular products. In the absence of such criteria, a product
would be assigned a product manager within UBS who would determine to which
asset class the product belonged and the risk profile of the product. However, due to
the inadequate due diligence performed, the product manager did not have the
necessary understanding about the underlying assets in the Fund and their associated

risks to determine the appropriate asset class for it. UBS accordingly classified the
Fund as falling within the “cash/liquidity” asset class and as “low risk”.

4.22. UBS deemed the Fund to be a potentially suitable product for all of its customers
regardless of the customers’ tolerance for risk because all customers had a “liquidity”
element to their portfolio of assets with UBS. However, this meant that customers
who had informed UBS that they were risk averse, that they wished to take “no risk”
or wanted to invest only in “low risk” investments could still be recommended by their
advisers to invest in the Fund.

4.23. The Fund was sold by advisers as the preferred product within UBS’ “cash/liquidity”
asset class, and in preference to the SVRF, even in circumstances where customers
were seeking capital security and access to their investment within three months. In
October 2007, it was recognised by senior management that many advisers were using
the Fund as a default cash offering and were not fully considering alternative products,
and some steps were taken to seek to address this.

Inadequate training on the Fund

4.24. Between December 2003 (when UBS made its first sale of the Fund) and November
2007, UBS advisers were not provided with sufficiently detailed training on the assets
in which the Fund was invested and the consequent risks of the Fund. UBS, therefore,
did not ensure that advisers had the appropriate understanding about the Fund to
determine if it was suitable for their customers.

4.25. Although advisers were provided with a significant amount of training and regularly
provided with AIG’s monthly information sheets for the Fund (which included a
breakdown of the ratings, sector, maturity and classes of the assets in which the Fund
was invested), advisers did not receive an adequate explanation of the significance of
the types of assets in the Fund and the Fund’s consequent risks. For example, material
used to train advisers prior to November 2007 described the PAB as being suitable for
customers who were “seeking means of enhancing cash yield”, required “access to
cash withdrawals” or had “specific tax or other liabilities to meet”. In making these
statements about suitability, the training materials did not differentiate between the
Fund and the SVRF.

4.26. In fact, the Fund was not suitable for customers who had tax bills or other liabilities to
meet because the Fund did not provide capital security due to the presence in the Fund
of asset backed securities and assets with terms of maturity of up to five years,
including floating rate notes.

4.27. Furthermore, the Fund was not suitable for customers who required access to their
money within three months. This is because ALICO reserved the right to defer
withdrawals for up to three months in exceptional circumstances (for example, if
ALICO was forced to sell the assets in the Fund at a loss in order to meet withdrawals,
ALICO could choose to defer withdrawals rather than deplete all cash reserves within
the Fund or suffer capital loss to the Fund. This risk crystallised on 15 September
2008).

4.28. Despite information relating to the above being included in the customer literature,
training and customer presentations throughout the Sales Period, advisers do not
appear to have understood properly how this might impact upon customers and to
have taken this into account when making recommendations. UBS failed to give
advisers adequate product-specific training and guidance to ensure that advisers
properly understood the more detailed but potentially important characteristics of the
Fund as well as its risks, could explain them adequately to customers, and determine
when another product should be recommended instead of the Fund. For example, one
adviser told UBS after the Fund had been suspended that he “wasn’t clear himself
what was actually in it [the Fund]”. Another adviser, when asked whether he thought
the Fund provided capital security, commented that “we all did to some extent” and
that “there was a view that the PAB was as safe as a bank account”.

4.29. Prior to November 2007, template presentations used by UBS to create bespoke
customer presentations did not explain the underlying asset profile of the Fund, and
stated that the Fund invested in “a wider range of money market instruments” than the
SVRF which gave the incorrect impression that the Fund was invested in money
market instruments exclusively.

4.30. From November 2007, the material used by UBS to train its advisers was improved to
explain the underlying asset profile of the Fund. The material now stated that the
Fund’s underlying investments included asset backed securities and floating rate
notes, provided a description of these assets in some detail and set out the Fund’s
exposure to different types of assets. The training material also explained different
types of risks to which the Fund was exposed, but as set out below did not explain all
of the risks properly or the circumstances in which these risks might crystallise.

Lack of suitability reports

4.31. UBS was required under the FSA’s rules to issue suitability reports when advising
customers to invest in the Fund for the first time. However, as a result of an apparent
misunderstanding from a discussion in 2001 with UBS’ then regulator, advisers were
not required by UBS to send suitability reports to customers at any time during the
Sales Period.

4.32. Advisers were instead trained to send a standard letter to customers prior to them
investing in the PAB which was referred to within UBS as an “indemnity letter”. This
letter was not a suitability report because it did not constitute a written explanation of
why the Fund was suitable for customers taking into consideration their particular
circumstances, or an explanation of the main consequences and possible
disadvantages of investing in the Fund.

4.33. The indemnity letter included details of different AIG products and was not specific to
the Fund. The customers were required to tick the box next to the product that they
wanted and acknowledge that they had received, read and understood the literature in
relation to that specific product. The product literature relating to the Fund consisted
of two documents which had been prepared by ALICO. The indemnity letter stated
that ALICO reserved the right, in exceptional circumstances, to defer encashments for
up to three months. By signing the indemnity letter, customers were asked to
acknowledge that in exceptional circumstances, they may not have direct access to

their investment. From December 2007, the indemnity letter was improved to (a)
refer to the underlying assets of the Fund (including certificates of deposit,
commercial paper, floating rate notes and asset backed securities); (b) warn customers
that their investment and return from it was only as secure as the selected range of
assets purchased by the funds the customer chose; and (c) warn customers that their
investment was at risk if any of those assets failed to meet their obligations.

4.34. However, there was no explanation to customers of when exceptional circumstances
could occur and how the composition of the Fund affected the risk of such
circumstances arising, or a proper indication of the adverse impact that this could have
on their investment.

4.35. UBS relied on customers reading the ALICO product literature as well as the
indemnity letter in order to understand the features and risks of the Fund. However,
some customers do not appear to have received the ALICO product literature.
Moreover, customers who had not received an appropriate oral explanation from their
adviser of the Fund’s risks, or had received a recommendation that the Fund was
suitable for their needs without highlighting the risks, could not be expected from
reading the indemnity letter and the ALICO product literature to recognise the
importance of the information, or that it might differ from their previous
understanding.

The FSA’s sales review

4.36. The FSA reviewed the files of sales of the Fund made by UBS to 33 of its customers.

4.37. The FSA found that 19 of the 33 customers were mis-sold the Fund because the Fund
was unsuitable for the customer for one or more of the following reasons:

(1)
the customer required capital security;

(2)
the customer required access to their investment within three months; and

(3)
the customer’s investment into the Fund resulted in the customer’s portfolio
with UBS not being appropriately diversified.

4.38. The FSA found that 12 of the remaining 14 customers may have been mis-sold the
Fund. There was information in the sales files indicating unsuitability, but the FSA
was unable to determine for certain whether these sales were unsuitable because there
was insufficient information documenting the sale of the Fund due to poor record
keeping.

Failings in relation to risk to capital

4.39. The FSA found that the Fund was sold to 15 customers who were “low risk”, “risk
averse” or “very cautious” in terms of their risk appetite, and who required capital
security.

4.40. The Fund was potentially unsuitable for these types of customers because a significant
proportion of its assets were not cash or near cash and because the Fund exposed them
to a level of capital risk which was greater than they appeared willing to accept.

Failings in relation to access to capital

4.41. The FSA found that the Fund was sold to eight customers who required access to their
investment within three months. The Fund could not guarantee access to capital
within three months because ALICO reserved the right to defer withdrawals for up to
three months in exceptional circumstances.

Failings in relation to diversification

4.42. The FSA found that four customers were advised to invest between 50% and 100% of
what appears to have been their total investable assets in the Fund. The FSA did not
find evidence of any reasonable rationale for this level of investment in the Fund.

4.43. Although the Fund’s underlying assets were diverse, by investing such a high
proportion of their overall wealth in one product, customers were over-exposed to
risks associated with ALICO and AIG and to the risk of the Fund failing to meet
regular withdrawal requests due to the long-dated nature of some of its underlying
assets.

Incorrect statements made to customers about the Fund

4.44. The FSA found that some advisers informed customers that the Fund offered
“immediate liquidity” and “instant access”. Advisers also sold the Fund to customers
who wanted to invest in “cash”, “near cash” or “close to cash”. In a significant
number of cases, customers were told that the Fund was a “money market fund”.
These statements, which gave a misleading impression of the level of capital and
liquidity risk associated with the Fund, may have been a result of advisers’ lack of
training on the risks of the Fund which was exacerbated by the internal classification
of the Fund as a low risk, “cash/liquidity” product that was potentially suitable for all
customers.

Failure to respond appropriately to the changing market conditions in late 2007
and during 2008

4.45. In late 2007 and during 2008, there was increased uncertainty with regard to the
market value and liquidity of some of the underlying assets of the Fund. These issues
particularly affected the asset backed securities (which were primarily backed by UK
residential and commercial mortgages) and floating rate notes in the Fund. As a result,
during this period, there was an increased risk of the Fund suspending redemptions
and of customers suffering a loss because:

(1)
the market value of a material proportion of the Fund’s assets dropped to
below their book value. This gave rise to an increased likelihood of ALICO
changing the valuation approach for the Fund’s units so that they reflected the
market value of those assets rather than their book value. This would have
resulted in a decrease in the value of the Fund’s units and consequently a
reduction in the value of customers’ investments in the Fund; and

(2)
there was speculation in the press about the financial stability of ALICO’s
parent company, AIG. Together with the volatile market conditions, this

increased the risk of a run on the Fund. In this event, ALICO was unlikely to
be able to meet all withdrawal requests without having to sell quickly some of
the longer dated and less liquid assets in the Fund at below book value. A
significant increase in withdrawals could have forced ALICO to suspend
withdrawals from the Fund to allow it to sell assets and fairly value customers’
units in the Fund.

4.46. From the third quarter of 2007, UBS took steps to improve its knowledge of the
specific portfolio of assets within the Fund. By July 2007, UBS had developed
concerns about the level of the Fund’s exposure to the US sub-prime market and
requested information from ALICO about the underlying assets in the Fund. UBS used
the information received from ALICO to review the underlying assets in the Fund.
From September 2007 onwards, UBS also:

(1)
started monitoring the underlying asset mix of the Fund on a regular basis;

(2)
monitored the long term credit ratings of ALICO and AIG and analysed the
impact of these ratings on the PAB;

(3)
reviewed UBS Investment Bank research on AIG;

(4)
reviewed information received from ALICO relating to the inflows and
outflows of the Fund; and

(5)
re-confirmed the ring-fencing of policyholder assets in the Fund by taking legal
advice on the protection afforded by the Delaware Insurance Code and the
extent of segregation in the UK and US business of ALICO and AIG.

4.47. In early September 2007, UBS formed a Cash Management Committee to take
responsibility for monitoring cash management funds in which UBS customers were
invested, including the PAB. The Committee had its first meeting on 17 September
2007.

4.48. During this meeting, the Committee received a presentation about the state of the
Fund prepared by a member of UBS wealth management staff who had performed an
examination of the Fund’s underlying assets based on information received from
ALICO. This presentation recognised that the Fund had close to 80% exposure to
assets with more than three months to maturity and a relatively large allocation to
floating rate notes and asset backed securities with a maturity of longer than 364 days.
In fact, at this point, approximately 28% of the assets within the Fund were floating
rate notes (with a maturity of 3 to 5 years) and 25% of the assets were asset backed
securities.

4.49. Furthermore, it was recognised in this presentation that the Fund’s “capital value is
vulnerable in any scenario where it is forced to liquidate its investments. This is
because, for a cash fund it has a relatively long weighted-average-life. Having said
that, it has significant short-term funds and it should be able to meet redemptions of
up to 20% of the fund without too many problems. Beyond that it might be forced to
either impose some time limit on withdrawals or, a haircut on the capital value.”

4.50. UBS recognised at this meeting that its own customers represented approximately
25% of the total investments in the Fund, and was concerned about the consequences
of this and whether there was sufficient liquidity to meet large redemptions.

4.51. UBS met with ALICO in early October 2007 and took comfort from ALICO’s
decision to increase the overall cash composition of the Fund in view of market
conditions by decreasing the proportion of asset backed securities and increasing the
proportion of overnight cash. However, UBS still had concerns about the Fund and
remained uncomfortable with the proportion of the Fund held by its own customers,
and increased its ongoing monitoring of the Fund’s liquidity levels.

4.52. In late October 2007, sales management expressed concerns to the Cash Management
Committee about the direct loss of business that might arise from a complete cessation
of sales of AIG products. In November 2007, senior management took the decision
that UBS should continue to sell the Fund because it considered “there [was] nothing
wrong with the product”, but “would avoid specific sales push” which it thought to be
inappropriate given the prevailing market environment around asset backed securities,
collateralised debt obligations and mortgage backed related instruments. It was
decided that the content of presentations and letters to customers would be updated
“so risks of AIG were spelled out” and that advisers would be updated following the
recognition noted at paragraph 4.23 above that many advisers had been treating the
PAB as a “default instrument” for customers’ cash management or liquidity needs.

4.53. From November 2007, changes were made to training materials and the indemnity
letter to place greater emphasis on the asset profile of the Fund and the implications of
this on its suitability for customers (as explained in paragraphs 4.30 and 4.33).
However, these documents still failed to explain the risks of the Fund properly.

4.54. Template presentations which were used by UBS to create bespoke customer
presentations were also amended to include some details about the underlying assets
of the Fund and to state that the Fund was “not equivalent to a cash deposit, and
clients must recognise the additional risks involved” and that it was “not suitable for
use as a general cash account with multiple subscriptions and redemptions”. The
presentations were also revised to no longer state that the Fund was suitable for
customers who had specific tax or other liabilities to meet, or for customers who
wanted access to cash withdrawals. UBS also failed to carry out a review of past sales
of the Fund to determine whether its risks had been adequately highlighted to
customers and whether they had received a suitable recommendation to invest in the
Fund.

4.55. Despite the change to training material, template customer presentations and the
indemnity letter, there is evidence that some advisers still did not fully understand the
underlying assets and risks of the Fund. For example, some advisers continued to sell
the Fund to customers who had low appetite for risk, who were “very cautious” and
who desired capital security, and the Fund was described to customers as a “cash
solution” or a “cash based option” which provided “enhanced cash rates”. This was
possibly because the Fund continued to be classified as a “cash/liquidity” product and
referred to within UBS as a cash product. Some advisers continued to sell the Fund as
a cash fund which provided instant access and capital security.

4.56. In 2008, some customers who had invested in the Fund contacted their advisers
expressing concerns about AIG. Some advisers, in turn, sought internal guidance. For
example, one adviser asked the product manager responsible for the Fund in February
2008 whether UBS was still comfortable with the Fund. The product manager’s
response was that UBS was still comfortable selling the Fund but that it was for each
adviser to assess with their customer whether a move to the SVRF was appropriate.
Some customers were reassured by their advisers that the Fund continued to be an
appropriate investment for them.

4.57. In March 2008, customers were contacted by UBS and provided a copy of AIG’s most
recent newsletter which set out a summary of the Fund’s composition and an
explanation of the increased risks of the Fund. Prior to this point, UBS had not sent
any communications to customers to attempt to explain the increased risks of the Fund
despite the fact that UBS had had concerns about the Fund since October 2007.

4.58. However, it appears that some advisers continued not to understand this information
or the increased risks. For example, one adviser told his customer in April 2008 that
the Fund had no exposure to sub prime. However, in February 2008, UBS had already
concluded from information received from ALICO that 7% of the Fund was exposed
to UK sub prime mortgages. Again, by 17 June 2008, UBS had discovered that 42%
of the Fund comprised floating rate notes with an average term to maturity of 2.75
years. Despite this knowledge, one customer was told in August 2008 that the Fund
was a “cash based option” and invested in the Fund later in the month.

4.59. Whilst UBS did take some appropriate steps in view of the changing market
conditions in late 2007 and 2008, overall they amounted to an insufficient response to
the increased risks to the Fund and UBS’ customers which UBS had identified.

Failure to assess customer complaints fairly

4.60. By September 2011, UBS had received complaints concerning the Fund from 119
customers who were invested in the Fund at the time of its suspension in September
2008 (representing 21% of the customers who remained invested in the Fund at
suspension on 15 September 2008). Compensation of approximately £2.8 million has
been paid to 27 customers and interest-free loans of £4.5m were advanced to six
customers.

4.61. The FSA reviewed complaints to UBS from 11 customers who had invested in the
Fund and found that each of these complaints had been assessed unfairly, although six
complaints had been upheld. In particular, UBS failed to assess fairly whether the
Fund had been suitable for these customers and employed a narrow complaints
handling methodology. Although the complaints were thoroughly investigated, UBS’
decision to reject or uphold a complaint depended primarily on whether the
complainant had received the ALICO product literature and indemnity letter. It
appears that in cases where complainants had received the ALICO product literature,
UBS would usually reject the complaint on the basis that the literature fully explained
the risks of the Fund. Issues relating to how advisers had assessed that the Fund was
suitable for complainants, and how advisers had described the Fund to the
complainants were not adequately addressed.

4.62. UBS also applied an inconsistent approach to its assessment of and reliance on
information and evidence collected as part of its investigation into the complaint. The
FSA found examples where complainants’ investment objectives, as set out in forms
they had completed when opening their accounts with UBS, were relied on as
evidence to support UBS’ position. However, this information was given no or
insufficient weight when it did not support UBS’ decision to reject the complaint.

Issues with risk profiling of customers who were sold the Fund

4.63. Customers completed risk profiling questionnaires when they opened their accounts
with UBS. These questionnaires assessed customers’ risk tolerance and investment
goals. The output of these questionnaires and follow-up discussions between
customers and their advisers resulted in customers being allocated one of the
following risk profiles: “Fixed Income”, “Income”, “Yield”, “Balanced”, “Growth”
and “Equity”. However, these profiles failed to describe the level of risk the customer
wished to be exposed to; rather, they summarised the types of assets that customers
should invest in which, in turn, determined the level of risk that they would assume.
For example, a customer with a “Fixed Income” risk profile would be investing
mostly in high quality fixed term instruments.

4.64. Some customers expressed one risk tolerance level for the liquidity element of their
portfolio which was different to their risk tolerance level for their overall portfolios.
However, during the Sales Period, this information about customers’ attitude to risk to
various elements of their portfolio was not always recorded by advisers when giving
advice in respect of the Fund. An internal review by UBS’ Group Internal Audit in
2008 found that this was due to confusion amongst advisers as to whether customers’
risk profiles should be recorded at the customer level, at portfolio level or both.

Failure to perform adequate monitoring and reviews in relation to sales of the
Fund

Failure to conduct annual reviews of customers’ risk profiles and portfolios

4.65. Advisers were expected to pro-actively contact their customers at least annually to
identify any changes in their personal circumstances, to review their risk profiles and
portfolios, and to update UBS’ electronic records accordingly. However, the annual
review of customer risk profiles by advisers was not always completed in a timely
manner and many were overdue at any one time.

4.66. An internal review carried out by UBS Group Internal Audit in 2008 identified that the
annual reviews were not being completed consistently by advisers. Due to a lack of
knowledge among advisers on how to record and keep customer risk profile
information on UBS’ electronic system up to date, and a lack of enforcement of the
requirements, advisers were not keeping adequate records to explain why customers’
risk profiles did not match up with customers’ portfolios. In a number of cases, the
portfolio held was more aggressive than the customer’s risk profile, or was more
aggressive than the one agreed at the account opening stage, without documentation to
explain the difference.

4.67. The weaknesses in recording and reviewing customers’ risk profiles placed customers
at an increased risk of being sold the Fund despite it not being suitable for their
circumstances and investment objectives. Following the Group Internal Audit review
in 2008, UBS has taken extensive steps to enhance its risk profiling and record-
keeping arrangements.

Failure to monitor adequately the composition of the Fund

4.68. Until the third quarter of 2007, UBS did not take adequate steps to monitor the asset
composition of the Fund. Although UBS carried out some monitoring of the Fund
prior to this period, this was completed on an ad hoc basis and was very high level.
However, UBS did periodically monitor AIG’s performance from 2004 onwards. UBS
also made enquiries into the ring-fencing of assets within the PAB in mid-2005.
Nevertheless, UBS did not carry out regular and sufficiently detailed analysis of the
composition of the underlying assets in the Fund until August 2007.

Failure to review sales of the Fund

4.69. During the Sales Period of nearly five years, UBS made 1,998 sales of the Fund.
However, UBS failed to perform any compliance monitoring review of these sales to
ensure that they had been suitable for customers.

Failure to keep adequate records

4.70. During the Sales Period, UBS failed to maintain adequate records in relation to its
sales of the Fund. In particular, with regard to sales made to 12 of the 33 customers
reviewed by the FSA, the deficiencies in the records meant that the FSA was unable to
make a determination as to whether the sale of the Fund was suitable for the customer.

4.71. Furthermore, UBS did not record whether customers were sold the Fund on an
advised, discretionary or non-advised basis (although UBS has confirmed that sales of
the Fund were made on an advised basis only).

5.
FAILINGS

5.1.
On the basis of the facts and matters set out above, UBS has breached Principle 9,
Principle 6 and certain rules set out in the FSA Handbook in relation to suitability,
complaints handling and record-keeping. These rules are referred to in Annex A.

5.2.
Principle 9 states:

“A firm must take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who is entitled to rely upon its judgment.”

UBS has breached Principle 9 by failing to take reasonable care during the Sales
Period to ensure the suitability of its advice in relation to the Fund for its customers.
UBS has also breached COB 5.3.5R and COBS 9.2.1R by failing to take reasonable
steps to ensure that its personal recommendations were suitable for its customers.

5.3.
In addition, UBS’ failure to issue suitability reports to customers to whom it had made
a personal recommendation to invest in the Fund resulted in breaches of COB 5.3.14R
and COBS 9.4.2R.

5.4.
Principle 6 states:

“A firm must pay due regard to the interest of its customers and treat them fairly.”

UBS has breached Principle 6 by failing to treat its customers fairly for the reasons set
out at paragraph 2.3(6).

5.5.
Furthermore, UBS breached Principle 6 and DISP 1.4.1R(2) by failing to assess fairly
complaints from its customers relating to UBS’ sales of the Fund.

5.6.
UBS has breached SYSC 9.1.1R and SYSC 3.2.20R(1) for failing to keep adequate
and orderly records of its business and internal organisation.

6.
SANCTION

Relevant guidance on sanction

6.1.
The FSA has considered the disciplinary and other options available to it and has
concluded that a financial penalty is the appropriate sanction in the circumstances of
this particular case.

6.2.
In determining the financial penalty, the FSA has had regard to guidance contained in
DEPP and ENF, which formed part of the Handbook during the Relevant Period.
During that period, both DEPP 6.5 and Chapter 13 of ENF contained some of the
factors that may be of particular relevance in determining the appropriate level of a
financial penalty. However, DEPP 6.5.1 G and ENF 13.3.4 G both stated that the
criteria listed in DEPP 6.5 and ENF 13.3 respectively were not exhaustive and that all
relevant circumstances of the case should be taken into consideration. In determining
whether a financial penalty is appropriate and the amount, the FSA is therefore
required to consider all the relevant circumstances of the case.

6.3.
The FSA considers that in this case, the financial penalty will promote high standards
of regulatory conduct by deterring firms who have breached regulatory requirements
from committing further contraventions, helping to deter other firms from committing
contraventions and demonstrating generally to firms the benefit of compliant
behaviour. It will strengthen the message to the industry that it is vital for firms to
take reasonable care to ensure the suitability of their advice to customers and to treat
customers fairly.

The nature, seriousness and impact of the breach in question

6.4.
The FSA has had regard to the seriousness of the breaches, including the nature of the
requirements breached, the number and duration of the breaches, the number of
customers who were exposed to risk of loss and whether the breaches revealed serious
or systemic weakness of the management systems or internal controls. In view of

these, the FSA considers that UBS’ breaches are of a serious nature. The failings in
relation to the sale of the Fund took place over a period of nearly five years, and the
failure to handle complaints about the Fund fairly occurred over a period of three
years.

6.5.
The FSA has also had regard to the following mitigating factors:

(1)
some of UBS’ sales of the Fund were made during the financial crisis. The
FSA recognises that, when selling the Fund between 2003 and the first part of
2007, UBS would not have expected the severe economic conditions which
existed during the financial crisis and their consequent impact on markets and
investment products;

(2)
UBS took steps to improve its knowledge and monitoring of the Fund from the
third quarter of 2007 onwards and took some, albeit inadequate, action in
relation to its sales of the Fund; and

(3)
some other distributors of the Fund also appear to have had a mistaken
impression as to the risks of the Fund.

The extent to which the breach was deliberate or reckless

6.6.
The FSA does not consider that the misconduct on the part of UBS was deliberate or
reckless. However, the FSA considers it particularly serious that UBS failed to take
reasonable care to establish and maintain an adequate sales process for the Fund and
ensure the suitability of its advice throughout the Relevant Period. The FSA also
considers it particularly serious that UBS failed to respond appropriately to issues it
identified in relation to the Fund and its sale of it.

The size, financial resources and other circumstances of the firm

6.7.
The FSA has taken into account UBS’ size and financial resources. UBS is one of the
largest investment banks in the UK with a major private banking arm. As such, it has
a leading competitive position in the market and its practices set an example for others
in the financial services industry. During the Sales Period, UBS’ gross income from
sales of the Fund and the SVRF was approximately £11.5 million. During the Sales
Period, UBS advised on investments in the Fund to approximately 1,998 customers.
The total value of initial investments in the Fund by UBS’ customers was
approximately £3.5 billion with additional investments into the Fund of approximately
£2.6 billion.

Disciplinary record and compliance history

6.8.
UBS was fined £8 million on 5 August 2009 for breaches of Principles 2 and 3 which
occurred between 1 January 2006 and 31 December 2007 in its wealth management
business, £29.7 million on 26 November 2012 for breaches of Principles 2 and 3
which occurred between 1 June 2011 and 14 September 2011 in its Global Synthetic
Equities business, and £160 million on 18 December 2012 for breaches of Principles 3
and 5 which occurred between 1 January 2005 and 31 December 2010 for misconduct
relating to the London Interbank Offered Rate and the Euro Interbank Offered Rate.

6.9.
None of these disciplinary actions related to the suitability of UBS’ advice to
customers.

Conduct following the breaches

6.10. UBS and its senior management have co-operated with the FSA during its
investigation.

6.11. Following discussions with the FSA, UBS has agreed to conduct a redress programme
in relation to sales of the Fund to its customers who remained invested at the time of
the Fund’s suspension on 15 September 2008. It is estimated that compensation
payable to customers will be in the region of £10 million.

7.
PROCEDURAL MATTERS

Decision makers

7.1.
The decision which gave rise to the obligation to give this Final Notice was made by
the Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for payment

7.3.
The financial penalty must be paid in full by UBS to the FSA by no later than 14 days
from the date of this Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding after 14 days from the date of this
Final Notice, the FSA may recover the outstanding amount as a debt owed by UBS
and due to the FSA.

Publicity

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this Notice relates. Under those provisions, the FSA must
publish such information about the matter to which this Notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to UBS or prejudicial to the
interests of consumers.

7.6.
The FSA intends to publish such information about the matter to which this Final
Notice relates as it considers appropriate.

FSA contacts

7.7.
For more information concerning this matter generally, contact Lance Ellison (direct
line: 020 7066 2422 /fax: 020 7066 2423) of the Enforcement and Financial Crime
Division of the FSA.

....................................................................................

Tom Spender

FSA Enforcement and Financial Crime Division

ANNEX A

1.
RELEVANT STATUTORY AND REGULATORY PROVISIONS

Statutory provisions

1.1.
Under section 2(2) of the Act, the protection of consumers is one of the FSA’s
statutory objectives.

1.2.
Section 206 of the Act provides:

“If the Authority considers that an authorised person has contravened a requirement
imposed on him by or under this Act, it may impose on him a penalty, in respect of the
contravention, of such amount as it appears appropriate.”

1.3.
UBS is an authorised person for the purposes of section 206 of the Act. The
requirements imposed on an authorised person include those set out in the FSA
Principles and rules made under section 138 of the Act.

1.4.
The FSA’s rule-making powers are set out in Chapter I of Part X of the Act (Rules and
Guidance). The FSA has made rules, in particular those contained in SYSC, COB,
COBS and DISP in accordance with its powers and provisions under this part of the
Act.

The Principles for Businesses

1.5.
Principle 6 states:

“A firm must pay due regard to the interest of its customers and treat them fairly.”

1.6.
Principle 9 states:

“A firm must take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who is entitled to rely upon its judgment.”

Conduct of Business (COB)

1.7.
COB 5.3.5R (in force between 1 December 2001 and 30 November 2004 (inclusive))
states:

“(1)
A firm must take reasonable steps to ensure that it does not in the course of
designated investment business:

(a)
make any personal recommendation to a private customer to buy or
sell a designated investment; or

(b)
effect a discretionary transaction for a private customer (except as in
(3));

unless the recommendation or transaction is suitable for the private customer
client having regard to the facts disclosed by him and other relevant facts

about the private customer of which the firm is, or reasonably should be,
aware.

(2)
A firm which acts as an investment manager for a private customer must take
reasonable steps to ensure that the private customer’s portfolio or account
remains suitable, having regard to the facts disclosed by the private customer
and any other relevant facts about the private customer of which the firm is or
reasonably should be aware.

(3)
Where, with the agreement of the private customer, a firm has pooled his funds
with those of others with a view to taking common discretionary management
decisions, the firm must take reasonable steps to ensure that a discretionary
transaction is suitable for the fund, having regard to the stated investment
objectives of the fund."

1.8.
COB 5.3.5R (in force between 1 December 2004 and 5 April 2006 (inclusive)) states:

(1)
A firm must take reasonable steps to ensure that, if in the course of designated
investment business:

(a)
it makes any personal recommendation to a private customer to:

(i)
buy, sell, subscribe for or underwrite a designated investment
(or to exercise any right conferred by such an investment to do
so); or

(ii)
elect to make income withdrawals; or

(iii)
enter into a pension transfer or pension opt-out from an
occupational pension scheme; or

(b)
it effects a discretionary transaction for a private customer (except as
in (5)); or

(c)
it makes a personal recommendation to an intermediate customer or a
market counterparty to take out a life policy;

the advice on investments or transaction is suitable for the client.

(2)
If the recommendation or transaction in (1) relates to a packaged product:

(a)
it must, subject to COB 5.3.8.G – COB 5.3.10R, be the most suitable
from the range of packaged products, on which advice on investments
is given to the client as determined by COB 5.1.7R; and

(b) if there is no packaged product in the firm’s relevant range of packaged
products which is suitable for the client, no recommendation must be
made.

(3)
In making the recommendation or effecting the transaction in (1), the firm
must have regard to:

(a)
the facts disclosed by the client; and

(b)
other relevant facts about the client of which the firm is, or reasonably
should be, aware.

(4)
A firm which acts as an investment manager for a private customer must take
reasonable steps to ensure that the private customer’s portfolio or account
remains suitable, having regard to the facts disclosed by the private customer
and other relevant facts about the private customer of which the firm is or
reasonably should be aware.

(5) Where, with the agreement of the private customer, a firm has pooled his funds
with those of others with a view to taking common discretionary management
decisions, the firm must take reasonable steps to ensure that a discretionary
transaction is suitable for the fund, having regard to the stated investment
objectives of the fund.”

1.9.
COB 5.3.5R (in force between 6 April 2006 and 31 October 2007 (inclusive)) states:

(1)
A firm must take reasonable steps to ensure that, if in the course of designated
investment business:

(a)
it makes any personal recommendation to a private customer to:

(i)
buy, sell, subscribe for or underwrite a designated investment
(or to exercise any right conferred by such an investment to do
so); or

(ii)
elect to make income withdrawals, or purchase a short-term
annuity or not; or

(iii)
enter into a pension transfer or pension opt-out from an
occupational pension scheme; or

(b)
it effects a discretionary transaction for a private customer (except as
in (5)); or

(c)
it makes a personal recommendation to an intermediate customer or a
market counterparty to take out a life policy;

the advice on investments or transaction is suitable for the client.

(2)
If the recommendation or transaction in (1) relates to a packaged product:

(a)
it must, subject to COB 5.3.8.G – COB 5.3.10R, be the most suitable
from the range of packaged products, on which advice on investments
is given to the client as determined by COB 5.1.7R; and

(b) if there is no packaged product in the firm’s relevant range of packaged
products which is suitable for the client, no recommendation must be
made.

(3)
In making the recommendation or effecting the transaction in (1), the firm
must have regard to:

(a)
the facts disclosed by the client; and

(b)
other relevant facts about the client of which the firm is, or reasonably
should be, aware.

(4)
A firm which acts as an investment manager for a private customer must take
reasonable steps to ensure that the private customer’s portfolio or account
remains suitable, having regard to the facts disclosed by the private customer
and other relevant facts about the private customer of which the firm is or
reasonably should be aware.

(5) Where, with the agreement of the private customer, a firm has pooled his funds
with those of others with a view to taking common discretionary management
decisions, the firm must take reasonable steps to ensure that a discretionary
transaction is suitable for the fund, having regard to the stated investment
objectives of the fund.”

1.10. COB 5.3.5AG (in force between 1 December 2004 and 31 October 2007) states:

(1)
If circumstances arise in which a firm reasonably concludes that there are
several packaged products in the relevant range which would satisfy the test in
COB 5.3.5R(2), it will act in conformity with that rule if it recommends only
one of those products.

(2)
If a client does not wish to proceed in accordance with a recommendation, a
firm may nonetheless make further recommendations providing any such
recommendation is suitable for the client in accordance with the obligation in
COB 5.3.5R

1.11. COB 5.3.14R (in force between 1 January 2003 and 30 November 2004 (inclusive))
states:

If, following a personal recommendation by the firm, a private customer:

(1)
buys, sells, surrenders, converts, cancels, or suspends premiums for or
contributions to, a life policy, pension contract or stakeholder pension scheme;
or

(2)
elects to make income withdrawals; or

(3)
acquires a holding in, or sells all or part of a holding in, a scheme; or

(4)
enters into a pension transfer or pension opt-out from an OPS;

the firm must provide the customer with a suitability letter, within the time period
stipulated by COB 5.3.18R, unless one of the exceptions in COB 5.3.19R applies.

1.12. COB 5.3.14R (in force between 1 December 2004 and 5 April 2006 (inclusive))
states:

(1)
A firm that gives a personal recommendation, in relation to a life policy, to a
person who is a policyholder or a prospective policyholder of a life policy,
must provide the person with a suitability letter prior to the conclusion of the
contract, unless one of the exceptions in COB 5.3.19 R applies.

(2)
If, following a personal recommendation by a firm that does not fall within (1),
a private customer:

(a)
buys, sells, surrenders, converts, cancels, or suspends premiums for or
contributions to, a pension contract or a stakeholder pension scheme;
or

(b)
elects to make income withdrawals or purchase a short-term annuity;
or

(c)
acquires a holding in, or sells all or part of a holding in, a scheme; or

(d)
enters into a pension transfer or pension opt-out from an OPS;

the firm must provide the customer with a suitability letter, within the time period
stipulated by COB 5.3.18R, unless one of the exceptions in COB 5.3.19R applies.

1.13. COB 5.3.14R (in force between 6 April 2006 and 5 April 2007 (inclusive)) states:

(1)
A firm that gives a personal recommendation, in relation to a life policy, to a
person who is a policyholder or a prospective policyholder of a life policy,
must provide the person with a suitability letter prior to the conclusion of the
contract, unless one of the exceptions in COB 5.3.19 R applies.

(2)
If, following a personal recommendation by a firm that does not fall within (1),
a private customer:

(a)
buys, sells, surrenders, converts, cancels, or suspends premiums for or
contributions to, a pension contract or a stakeholder pension scheme;
or

(b)
elects to make income withdrawals or purchase a short-term annuity;
or

(c)
acquires a holding in, or sells all or part of a holding in, a scheme; or

(d)
enters into a pension transfer or pension opt-out from an OPS;

the firm must provide the customer with a suitability letter, within the time
period stipulated by COB 5.3.18R, unless one of the exceptions in COB
5.3.19R applies.

1.14. COB 5.3.14R (in force between 6 April 2007 and 31 October 2007 (inclusive)) states:

(1)
A firm that gives a personal recommendation, in relation to a life policy, to a
person who is a policyholder or a prospective policyholder of a life policy,
must provide the person with a suitability letter prior to the conclusion of the
contract, unless one of the exceptions in COB 5.3.19 R applies.

(2)
If, following a personal recommendation by a firm that does not fall within (1),
a private customer:

(a)
buys, sells, surrenders, converts, cancels, or suspends premiums for or
contributions to, a personal pension scheme or a stakeholder pension
scheme; or

(b)
elects to make income withdrawals or purchase a short-term annuity;
or

(c)
acquires a holding in, or sells all or part of a holding in, a scheme; or

(d)
enters into a pension transfer or pension opt-out from an OPS;

the firm must provide the customer with a suitability letter, within the time
period stipulated by COB 5.3.18R, unless one of the exceptions in COB
5.3.19R applies.

Conduct of Business Sourcebook (COBS)

1.15. COBS 9.2.1R (in force between 1 November 2007 and present) states:

(1)
A firm must take reasonable steps to ensure that a personal recommendation,
or a decision to trade, is suitable for its client.

(2)
When making the personal recommendation or managing his investments, the
firm must obtain the necessary information regarding the client’s:

(a)
knowledge and experience in the investment field relevant to the
specific type of designated investment or service;

(b)
financial situation; and

(c)
investment objectives;

so as to enable the firm to make the recommendation, or take the decision,
which is suitable for him.

1.16. COBS 9.4.2R (in force between 1 November 2007 and present) states:

If a firm makes a personal recommendation in relation to a life policy, it must provide
the client with a suitability report.

Senior Management Arrangements Systems and Controls Sourcebook (SYSC)

1.17. SYSC 3.2.20R(1) (in force between 1 December 2001 and present) states:

“A firm must take reasonable care to make and retain adequate records of matters
and dealings (including accounting records) which are the subject of requirements
and standards under the regulatory system.”

1.18. SYSC 9.1.1 R (in force between 1 November 2007 and 30 June 2011 (inclusive))
states:

“A firm must arrange for orderly records to be kept of its business and internal
organisation, including all services and transactions undertaken by it, which must be
sufficient to enable the FSA or any other relevant competent authority under MiFID to
monitor the firm's compliance with the requirements under the regulatory system, and
in particular to ascertain that the firm has complied with all obligations with respect
to clients.”

Dispute Resolution: Complaints (DISP)

1.19. DISP 1.4.1R (in force between 1 November 2007 and 31 August 2011 (inclusive))
states:

“Once a complaint has been received by a respondent, it must:

(1)
investigate the complaint competently, diligently and impartially;

(2)
assess fairly, consistently and promptly:

(a) the subject matter of the complaint;

(b) whether the complaint should be upheld;

(c) what remedial action or redress (or both) may be appropriate;

(d) if appropriate, whether it has reasonable grounds to be satisfied that
another respondent may be solely or jointly responsible for the matter alleged
in the complaint;

taking into account all relevant factors;

(3)
offer redress or remedial action when it decides this is appropriate;

(4)
explain to the complainant promptly and, in a way that is fair, clear and not
misleading, its assessment of the complaint, its decision on it, and any offer of
remedial action or redress; and

(5)
comply promptly with any offer of remedial action or redress accepted by the
complainant.”

1.20. DISP 1.4.1R (in force between 1 September 2011 and present) states:

“Once a complaint has been received by a respondent, it must:

(1)
investigate the complaint competently, diligently and impartially, obtaining
additional information as necessary;

(2)
assess fairly, consistently and promptly:

(a) the subject matter of the complaint;

(b) whether the complaint should be upheld;

(c) what remedial action or redress (or both) may be appropriate;

(d) if appropriate, whether it has reasonable grounds to be satisfied that
another respondent may be solely or jointly responsible for the matter alleged
in the complaint;

taking into account all relevant factors;

(3)
offer redress or remedial action when it decides this is appropriate;

(4)
explain to the complainant promptly and, in a way that is fair, clear and not
misleading, its assessment of the complaint, its decision on it, and any offer of
remedial action or redress; and

(5)
comply promptly with any offer of remedial action or redress accepted by the
complainant.”