UBS admits failure of internal controls

UBS, the Swiss bank hit by an alleged rogue trading incident, admitted on Tuesday that its internal controls had failed and that it was looking at whether to "claw back" bonuses from some individuals as a result of the incident. While the overall bank was able to report a SFr1bn (£711m) profit for the third quarter , the investment bank posted a pre-tax loss of SFr650m after the unauthorised trading loss, a drop in revenues because of the eurozone crisis and a weaker Swiss franc. Analysts focused on the compensation ratio – the amount of money set aside to pay staff relative to income – reaching 94% inside the investment bank although the management defended this high level by saying it included deferral of bonuses from previous years. In total, the bank set aside SFr775m for "variable compensation" in the third quarter, compared with SFr867m in the second quarter, and said SFr467m was related to prior years' bonus deals. Finance director Tom Naratil admitted that some staff may have to pay back a portion of their bonuses. "We do have a harmful act clause. As we review individuals' accountability for the incident we'll be reviewing if the harmful act clause applies," he said. A number of resignations have taken place since suspected rogue trader Kweku Adoboli was arrested and charged with four counts of fraud and false accounting. He is yet to enter a plea to the charges and is due in court next month. Among those to leave are the chief executive Oswald Grübel , as well as the two co-heads of equities – Francois Gouws and Yassine Bouhara – as well as handful of others who are facing "disciplinary action". Naratil also indicated that the bank was keen to pay bonuses, despite the loss in the investment bank. "We are in a competitive market, particularly for talent," he said. In a filing to the Securities and Exchange Commission in the US, made at the same time as it published third-quarter results, UBS said its internal controls were "not effective". It is required to make a statement about internal controls under the Sarbanes-Oxley Act, brought in a decade ago after the Enron scandal. The bank highlighted two control deficiencies: • the control requiring confirmation with counterparties of trades within the investment banking equities business • the controls for relationships between different trading desks within the investment bank's equities and fixed income, currencies and commodities businesses to ensure that internal transactions are valid and accurately recorded in UBS's books and records. "Investigations are ongoing, and management may become aware of facts relating to the investment bank that cause it to broaden the scope of the findings described above and to take additional remedial measures," the bank said. The bank, which employs 6,000 people in the UK, is now expected to announce plans to scale back its investment banking arm – putting more UK jobs at risk – at a presentation in New York on 17 November. Its German rival, Deutsche Bank, also admitted on Tuesday that it was cutting 10% of its investment banking staff even as it reported a better than expected third-quarter pre-tax profit. "During the third quarter, the operating environment was more difficult than at any time since the end of 2008, driven by a deteriorating macro-economic outlook, and significant financial market turbulence," said Josef Ackermann, the Deutsche Bank chief executive who has also been involved in the talks to try to solve the eurozone debt crisis. Deutsche's third-quarter pre-tax profit of €942m (£820m) included €329m from the corporate and investment bank which had reported €1.3bn a year earlier. Deutsche Bank has written down its exposure to Greek government bonds to 46% of their face value – although the European Banking Authority is asking banks to assess their capital on the basis of a 60% loss. Finance director Stefan Krause said it would be able to meet the capital requirements set out by the EU.