The UK’s Financial Services Authority has fined JPMorgan Securities GBP33.32m for failing to protect client money by segregating it appropriately.
Under the FSA’s client money rules, firms are required to keep client money separate from the firm’s money in segregated accounts with trust status. This helps to protect client money in the event of the firm’s insolvency.
The FSA says: “Between 1 November 2002 and 8 July 2009, JPMSL failed to segregate the client money held by its futures and options business with JPMorgan Chase Bank. The error occurred following the merger of JPMorgan and Chase. Instead of being held overnight in a segregated money market account, JPMSL’s futures and options client money was held in an unsegregated account with JPMCB. This error remained undetected for nearly seven years.”
During this period, the client money balance held by the futures and options business of JPMorgan Securities varied between USD1.9bn (in December 2002) and USD23bn (in October 2008). Had the firm become insolvent at any time during this period, this client money would have been at risk of loss.
Margaret Cole, FSA director of enforcement and financial crime, says: "JPMSL committed a serious breach of our client money rules by failing to segregate billions of dollars of its clients’ money for nearly seven years. The penalty reflects the amount of client money involved in this breach.
“The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected. Despite being one of the largest holders of client money in the UK, JPMSL failed to do so. 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."
In working out the level of the penalty the FSA took into account that the misconduct was not deliberate and that the firm self-reported on discovering the issue – it also immediately remedied the situation. No clients of JPMorgan Securities suffered any losses as a consequence of the segregation error, nor was there any incorrect financial reporting by JPMorgan Securities for the period 2001-2008. The size of the penalty is equivalent to one per cent of the average amount of unsegregated client money held by JPMorgan Securities with JPMorgan Chase Bank.
The firm worked constructively with the FSA in the course of its investigation and agreed to settle at an early stage. In doing so it qualified for a 30 per cent discount.
The FSA has established a new unit to enhance and strengthen its existing capabilities in the area of client money and assets. The unit consists of teams responsible for specialist supervision, policy, data analysis and risk management.
Sally Dewar, FSA managing director of risk, adds: "It is crucial that firms are compliant with the FSA’s client money and assets rules. Adhering to these rules not only ensures greater protection of clients but of financial stability as a whole. The creation of a specific unit means that firms need to raise their game as the FSA’s focus on this area will continue to intensify."
