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JPMorgan London Unit Gets Record Fine From U.K.’s FSA

The FSA Headquarters in Cananry Wharf, London
The Financial Services Authority (FSA) fined JPMorgan Chase & Co's London unit 33.3 million pounds for not properly separating client money from the firm's accounts. Photographer: Jason Alden/Bloomberg News

JPMorgan Chase & Co.’s London unit was fined a record 33.3 million pounds ($48.6 million) by Britain’s financial regulator for not properly separating client money from the firm’s accounts.

An average of $8.6 billion wasn’t properly segregated by JPMorgan Securities Ltd. in an error that went undetected for seven years, the Financial Services Authority said in a statement today. As much as $23 billion of client money held by the bank’s futures and options business wasn’t put in separate overnight customer accounts between 2002 and 2009, the FSA said.

The bankruptcy of Lehman Brothers Holdings Inc., which roiled financial markets worldwide in 2008, forced the FSA to put financial companies on notice that they must properly separate client funds. New York-based Lehman’s creditors filed more than $830 billion of claims and regulators worldwide are trying to unravel how money moved through its global units.

“The FSA has repeatedly emphasized the importance of ensuring that client money is adequately protected,” said Margaret Cole, the FSA’s enforcement director. “This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated in accordance with FSA rules. Firms need to sit up and take notice of this action -- we have several more cases in the pipeline.”

Had the company gone bankrupt, clients could have lost all their money because they would have been unsecured creditors rather than having the right to claim back money from ring-fenced accounts, according to the regulator.

Reduced Fine

JPMorgan spokesman David Wells declined to comment. The New York-based bank escaped a 47.6 million-pound fine by cooperating with the regulator, according to the FSA’s statement. No clients lost money, and the mistake didn’t affect the bank’s financial reporting, the FSA said. JPMorgan said in August that it may have mixed 8.5 billion pounds of clients’ money with its own funds, and that it hired KPMG LLP to review its accounts.

The breach was “regretful,” according to an internal memo by JPMorgan Securities Chief Executive Officer Daniel Pinto and obtained by Bloomberg News.

“The settlement involves us paying a fine based on a fixed formula of 1 percent of the average amount of client money held by our F&O business,” Pinto said in the memo. “As the FSA acknowledges, JPMorgan Securities Ltd. is one of the largest holders of client money in the U.K., and the size of the fine reflects that.”

‘Patently Inconsistent’

The error stemmed from the 2000 merger of JPMorgan & Co. with the Chase Manhattan Corp., according to the FSA’s investigative report. After the merger the combined treasury function didn’t recognize client money from the futures and options business, according to the report.

The regulator said in January that two firms that it didn’t identify faced a penalty after the FSA started investigations into how they held client money. Those inquiries were started at the same time as a London judge ruled that the FSA’s client-money rules were “patently inconsistent and flawed” in a case over the administration of Lehman’s European unit.

The regulator said at the time that it would consult on changes to parts of its rulebook, specifically over transfer arrangements and on firms keeping buffers that could top up client-money accounts. Proposals are scheduled later this year.

“The client-money regime was neglected by the FSA prior to the financial crisis,” said Darren Fox, a regulatory lawyer at Simmons & Simmons advising a hedge fund in the Lehman case. “I wonder whether today’s fine is symptomatic of the FSA’s guilty conscience in relation to the Lehman client-money failings, for which the FSA received a fair bit of flak.”

Tougher Approach

Today’s fine is nearly twice as much the then-record 17 million-pound fine levied against Royal Dutch Shell Plc in 2004 for market abuse.

The agency has said fines will increase as part of its new tougher approach following the financial crisis. In some cases, penalty size will triple.

The U.K.’s coalition government has said it will merge some of the FSA’s enforcement powers with other prosecutors to form a white-collar crime agency even in the wake of increased penalties and criminal cases filed by the FSA.

The FSA may also lose its independence to the Bank of England and Chancellor of the Exchequer George Osborne is considering scrapping it, the Guardian newspaper reported today, citing government sources.

“It’s good to see they’re doing their job; they’ve got to crack down on abuses,” Vince Cable, the Liberal Democrat lawmaker who is the coalition government’s business secretary, said of today’s fine in a Bloomberg TV interview. “The basic point, which I know the chancellor is trying to ensure, is that the Bank of England has proper oversight of systemic risk. How you do it administratively is not an easy task.”

Amid the uncertainty, the FSA enforcement team separately suffered a defeat today with its first loss of an insider- trading trial. Two lawyers and a former chief financial officer were cleared today by a London court in the regulator’s fourth criminal case of insider dealing to reach jury trial.

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