By Brooke Masters

in London

UBS has been hit with the third-largest fine levied by the UK financial watchdog for failing to stop employees from using customer accounts to speculate in the foreign exchange and commodities markets.

After a UBS employee blew the whistle, an internal investigation revealed that a desk head and three other employees in the international wealth management business had been placing up to 50 unauthorised trades a day in 2006 and 2007, according to a final notice from the UK Financial Services Authority.

The employees exploited loose controls on trade reporting to allocate their losses to customer accounts and repeatedly moved money around to hide their activities, the notice said. The activities led to client losses of nearly £26m ($43m) over a two-year period.

UBS has been fined £8m and has paid restitution of the losses to 39 customers. The employees involved no longer work at the bank. The FSA would not comment on their status, and the final notice did not say whether they profited from the trading.

The FSA said the UBS traders took advantage of rules that allowed the international desk to wait up to 24 hours before specifying which account number they were trading for.

The employees were also able to consolidate groups of trades into a single trade with an average price, hiding the number of trades and true prices. The employees were also able to cancel trades that had already been booked to one account and then rebook them to another.

“These employees were able to take advantage of UBS’s inadequate systems and controls, giving them free rein to make unauthorised trades with customer money that they were then able to conceal,” said Margaret Cole, FSA director of enforcement and financial crime.

The Swiss bank said it “deeply regrets this incident”, had co-operated with the FSA and was pleased that the matter had been settled. UBS qualified for a partial early settlement discount on its fine of 20 percent. The UK wealth management division has since upgraded its risk management systems.

Steven Francis, law partner at Reynolds Porter Chamberlain, said the case served as a “what-not-to-do manual for a compliance department... This is a truly massive fine”. Simon Morris of law firm CMS Cameron McKenna said the case served as “a clear message to all wealth managers”.