On Thursday, JP Morgan Securities Ltd., the London arm of JPMorgan Chase & Co. (JPM) was fined $49 million (£33.32 million) by United Kingdom Financial Services Authority (FSA).
 
The largest penalty ever was imposed by UK financial regulator as the firm failed to effectively protect client money in the range of $1.9 billion and $23 billion between November 2002 and July 2009. The average amount of money left unprotected was $8.55 billion.
 
JPMorgan’s fine followed record of £17 million penalty paid by Royal Dutch Shell (RDS.B) in 2004 for overstating oil and gas reserves.
 
According to the FSA rules, since 2002, the banks, brokers and insurance companies are required to keep client money in separate accounts apart from their own money. The rule was implemented to protect customers’ money in case of bankruptcy.
 
In 2000, JPMorgan & Co and Chase Manhattan Corporation got merged to form JPMorgan Chase & Co., following which JPMorgan failed to segregate client money held by its futures and options business (F&O) with JPMorgan Chase Bank N.A.
 
During the recent down turn of the economy, the clients could have been exposed to losses, if JPMorgan had been within the group of failed banks as it was unable to keep a significant portion of its clients’ money in a proper secured account.
 
When JPMorgan came across the issue in July 2009, it rectified the problem and cooperated with the FSA.
 
FSA agreed and interpreted that the misconduct on the part of JPMorgan was not deliberate as the firm had alerted the regulator about the error previously. As a result, JPMorgan was awarded with the discount of 30% on its original 47.6 million pound fine.
 
No losses were recorded for clients as JPMorgan was in a good shape with respect to financials during the financial crisis. Besides, acquisition of troubled Bear Stearns Cos in March 2008 and acquisition of banking operations of Washington Mutual Bank added another feather to the cap.
 
After JPMorgan scandal, the FSA has taken strict steps to address the industry-wide problem that has embarrassed the UK regulators. Over the last six months, the FSA identified failures 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.
 
As part of its shielding steps, the FSA has formed a new division specifically to ensure that client money and assets are handled correctly and targeted supervision and regulatory intervention.
 
It is expected that several more enforcement cases will be uncovered in the next few weeks after due diligence being showed by the FSA.
 
JPMorgan’s closest peers Bank of America Corp. (BAC) and Citigroup (C) have not come under such issues yet.
 
Though JPMorgan was spared from facing a severe unethical situation, it could have been on the same platter of Lehman Brothers. Nearly two years after the collapse of Lehman in September 2008, many creditors are still in the hope of getting back their money.
 
However, we think that JPMorgan is in a relatively good shape from a capital perspective. Management remains focused on managing asset levels efficiently during this recovery phase of the economy. JPMorgan’s capital position is expected to be a major differentiator going forward vis-à-vis its peers as it implies a lower risk of additional capital raises and greater opportunity for market share gains. We expect the company to continue building capital over the next couple of years, resulting in a better financial position.
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