"The Financial Services Authority (FSA) has fined UBS AG for failures in the sale of the AIG enhanced variable rate fund," it said in a statement.
"These failures led to UBS customers being exposed to an unacceptable risk of an unsuitable sale of the fund," the authority said.
"UBS also failed to deal properly with complaints from customers about sales of the fund."
The FSA added that UBS had sold the fund to 1,998 high net worth customers, between December 2003 and September 2008, with investments totalling about £3.5 billion.
However, the values of some of the assets in the fund — which invested in financial and money market instruments — plunged dramatically when the global financial crisis struck.
The FSA said there was a run on the fund when Lehman Brothers applied for Chapter 11 bankruptcy protection in the US on September 15th 2008, and as US insurance giant AIG saw its share price collapse.
The fund was then suspended, with customers prevented from withdrawing their cash, due to the large number of investors seeking to cash out.
The FSA added on Tuesday that UBS had agreed to conduct a redress programme for customers who remained in the fund at the time of its suspension.
The Swiss bank was expected to pay compensation of around £10 million.
"UBS's conduct fell far short of what its customers deserved and what the FSA requires," added Tracey McDermott, the FSA's director of enforcement and financial crime, in the statement.
"It failed to ensure it understood the product it was selling, failed to recommend it to the right customers and failed to take effective action in the financial crisis when the problems with the fund came to the fore."
The fine is just the latest in a string of penalties paid by UBS, including fines totalling1.4 billion francs for the bank's role in the Libor rate fixing scandal.