UK fines JPMorgan record $49 million

LONDON Thu Jun 3, 2010 1:29pm EDT

A trader works in the J.P. Morgan stall on floor of the New York Stock Exchange, September 14, 2009. REUTERS/Brendan McDermid

A trader works in the J.P. Morgan stall on floor of the New York Stock Exchange, September 14, 2009.

Credit: Reuters/Brendan McDermid

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LONDON (Reuters) - U.S. investment bank JPMorgan Chase & Co has been fined a record 33.32 million pounds ($49.12 million) in Britain for failing to protect billions of dollars of client money over almost seven years.

Issuing a stark warning to other banks operating in Britain, the country's Financial Services Authority said on Thursday that JPMorgan Securities Ltd, a UK unit of the bank, had failed to adequately protect between $1.9 billion and $23 billion of client money between November 2002 and July 2009.

"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," said Margaret Cole, the FSA's head of enforcement.

Under FSA rules, companies have to ringfence client money from the firm's money and keep it in segregated accounts with trust status to protect it in the event of an insolvency.

However, JPMorgan failed to segregate client money held by its futures and options business (F&O) with JPMorgan Chase Bank N.A. (JPMCB) following the merger of JPMorgan & Co and Chase Manhattan Corporation in 2000. The error remained undetected for nearly seven years.

Lawyers voiced surprise at the size of the penalty, which one said should serve as a "wake up call" to senior managers.

"This is a staggering fine for what is in effect an administrative oversight," said Simon Morris of law firm CMS Cameron McKenna. "The one surprise is that FSA hasn't also gone against the senior managers responsible for this mistake, which is now its normal practice."

JPMorgan has performed due diligence checks in its futures business globally since uncovering the error in Britain, a person familiar with the bank said. The internal checks indicate the mistake was a one-off issue resulting from the Chase merger, the person said.

The second-largest U.S. bank by assets, JPMorgan was profitable during the financial crisis and won market share in part by acquiring troubled Bear Stearns Cos in March 2008 and failed Seattle thrift Washington Mutual Inc, just days after Lehman Brothers filed for bankruptcy in September 2008.

JPMorgan declined comment.

ERROR 'NOT DELIBERATE'

No clients suffered any losses from the breach. But the FSA has been keen to prove its mettle after battling accusations of failing to spot and halt the excessively risky banker behavior that helped trigger the worst credit crisis since World War Two.

In handing down the record fine, its largest since penalizing oil company Royal Dutch Shell 17 million pounds in 2004 for overstating oil and gas reserves, the FSA said it took into account that the misconduct was not deliberate.

It also noted JPMorgan reported the error to the regulator after spotting it last July during conversations between senior staff in its compliance and treasury departments, that it immediately rectified the problem and cooperated with the FSA.

JPMorgan's cooperation with the FSA earned it a 30 percent discount on its original 47.6 million pound fine, in line with FSA practice.

After the financial crisis brought banks around the world to their knees and crawling to the taxpayer for bail-outs, the FSA has stepped up targeted supervision and regulatory intervention.

It created a specialist CASS (Client Asset Sourcebook) task force last year to measure and mitigate risks to client money and assets -- and has warned compliance departments of financial institutions to expect spot checks.

Over the last six months, the FSA said it had identified failings that included poor management oversight and control, a lack of trust status for segregated accounts, unclear arrangements for segregating client money and incomplete or inaccurate records.

The regulator has demanded costly and lengthy investigations by third parties -- so-called skilled person reports, made two enforcement referrals, issued private warnings and even frozen assets and issued a ban on taking on new business.

($1=.6783 Pound)

(Additional reporting by Douwe Miedema and Steve Slater in London and Elinor Comlay in New York; Editing by Andrew Callus)

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