The Financial Services Authority has issued JP Morgan Securities with a record £33.32 million fine, after the firm failed to separate its own money from that of clients for over seven years.
The problem marked a failure by the company to maintain the correct banking processes, the FSA noted, following a major system change.
On 1 November 2002, nearly two years after the merger of JP Morgan and Chase Manhattan, a subsidiary, JP Morgan Securities moved its activities onto systems used by other parts of the JP Morgan Chase group. As well as standardising on one system, the move was intended to reduce operational risk.
The problem of unsegregated money was related to the securities division’s funding and transfer pricing systems for Futures and Options that was moved over to systems in other parts of the bank. The division’s ledger was also transferred to a different, unnamed system.
Prior to the changes, at the end of each business day, F&O client money was transferred into a segregated overnight money market account. But from the day of the systems change, by error this no longer happened.
The FSA said that F&O staff were wrong to have assumed that the treasury would continue to place the client money into a segregated account, separated from its own money, after the changes. The treasury has said it did not know the money it failed to separate was client money.
JP Morgan only discovered the errors on 8 July last year, during an executive meeting. It declined to comment.
The FSA described the breach as “particularly serious” because JP Morgan Securities is “one of the largest holders of client money in the UK”. Globally, at one point the unsegregated money totalled $23 billion (£15.7 billion), and averaged $8.6 billion over the period. It also criticised the fact the error went unnoticed for seven years.
It said client money rules existed to ensure client money is “ring-fenced” and protected in the event of the insolvency of a firm. JP Morgan’s breach of the rules would have put its clients at “significant risk” if the company had gone bust.
Had JP Morgan carried out a post-implementation review after the F&O system changes, it “might have” identified that the correct processes were no longer being carried out, the FSA said. The company had failed to understand the effect of the system changes on its business, and had not put in place the right control processes to check the segregation of client money.
By settling early, JP Morgan Securities avoided a £48 million fine. The level of penalty was also reduced because the breach was judged as an error, and JP Morgan had notified the FSA and taken action.
Margaret Cole, director of enforcement and financial crime at the FSA, warned that several more cases of other businesses not segregating client money are now “in the pipeline”. The businesses have not been named.