FSA fines J.P. Morgan record 33.2 million GBP for failing segregation of client money

On Thursday, Britain’s Financial Services Authority whacked JP Morgan for failing to segregate client money during the merger with Chase — resulting in what regulators trumpeted as the FSA’s ‘largest ever’ fine at £33.32m.

Something to shout about when the government is about to abolish you, we guess.

From the FSA statement:

The Financial Services Authority (FSA) has fined J P Morgan Securities Ltd (JPMSL) £33.32 million 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.

Between 1 November 2002 and 8 July 2009, JPMSL failed to segregate the client money held by its futures and options business (F&O) with JPMorgan Chase Bank N.A (JPMCB). The error occurred following the merger of JPMorgan and Chase. Instead of being held overnight in a segregated money market account, JPMSL’s F&O 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 F&O business of JPMSL varied between $1.9 billion (in December 2002) and $23 billion (in October 2008). Had the firm become insolvent at any time during this period, this client money would have been at risk of loss.

The FSA was quick to remind that the penalty could have been EVEN BIGGER:

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 JPMSL suffered any losses as a consequence of the segregation error, nor was there any incorrect financial reporting by JPMSL for the period 2001-2008. The size of the penalty is equivalent to 1% of the average amount of unsegregated client money held by JPMSL with JPMCB.

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% discount.

It’s as if the imminent threat of utter destruction has just made Britain’s FSA even more determined to dish out some banking justice.

http://ftalphaville.ft.com/blog/2010/06/03/250871/the-fsa-fine-slapping-to-the-end/?updatedcontent=1