JP Morgan fined a record £33 million – auditors in firing line

JP Morgan’s securities arm has been fined £33.32 million by the UK Financial Regulator. At the height of the financial crisis JP Morgan’s futures and options business was keeping about $23 billion (£16 billion) in institutional client money mixed up with its own central treasury money in unsegregated accounts at the securities division of the parent bank. Had the bank run into difficulties, clients such as pension funds and hedge funds would have risked losing their money.

Margaret Cole, the Financial Services Enforcement Director said “This penalty sends out a strong message to firms of all sizes that they must ensure that client money is segregated in accordance with FSA rules…. We have several more cases in the pipeline.” This rule was introduced in 2002 and auditors were relied upon as quality controllers until this recent crisis. The FSA has set up a separate 22 man unit focused on the client asset issue. The reason for the large fine is the reality of the risk that was posed over those seven years.

The JP Morgan problem dates back to the merger with Chase Manhattan and lasted for seven years. Auditor PricewaterhouseCoopers repeatedly certified that the abank was properly handling client money. JP Morgan discovered the issue in July 2009 and reported it to the FSA and received a discount for early settlement.

The Financial reporting council which oversees auditors said that it would consider the evidence from the FSA and decide whether it would need to investigate further. PwC did not comment.

Clearly, there is a standards and accreditation problem in international auditing. Otherwise what was going on with auditors in JP Morgan not to mention in AIB, BoI and Anglo. The segregation of client money is a huge issue and still remains so for those with money in the collapsed Lehman Brothers Bank. In January last, the FSA send a letter to 1000 chief executives of the largest investment groups and brokerages warning them to make certain that client money was held separately.

The FSA is requiring each bank to nominate a specific person in charge of protecting client money.