The Financial Services Authority (FSA) is fining JP Morgan Securities Ltd (JPMSL) a record £33.32 million. The sanction from the regulator is for failing to protect its clients' money by mistakenly placing it with its own over a period of seven years. The misconduct was not deliberate and no clients suffered a loss due to the mistake, which is why the FSA granted a 30 per cent reduction in the fine from the original £47.6 million.

Under the FSA's client money rules, businesses 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 going insolvent.

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.

Commenting on the record fine, Margaret Cole, FSA director of enforcement and financial crime, said: "JPMSL committed a serious breach of our client money rules by failing to segregate billions of dollars of its clients' money for nearly seven years. The penalty reflects the amount of money involved in this breach."

The FSA sent out a warning letter to the industry the year before after finding out that a number of businesses had not properly been segregating client money. A new unit was set up within the regulator to advise on this issue and this fine is one of its first actions. "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," added Cole.

How banks treat client funds has been under increased scrutiny ever since the collapse of Lehman Brothers, which saw many clients with money trapped in the bank suffer significant liquidity problems with some even going under. It's no wonder the FSA is keen to set an example in this area with a record breaking fine.

David Sherriff, chief operating officer, at the vendor Microgen, believes that the FSA announcement may well intensify the pressure on an industry already struggling to fend off wholesale changes to the way it operates. "The biggest concern in the financial community right now is that it will come under increasing legislative and regulatory pressure to split retail and investment divisions to create two entirely separate legal entities," he says. "The theory goes that by reducing their size banks will no longer be too big to fail and that client interests will be better protected. The largest fine ever made by the FSA on a bank will only add fuel to the fire."

"However, in my opinion, such a move would arguably take the banking industry back two decades. To defend their position banks will need to generate greater financial transparency into their balance sheet and report in more granular detail on their risk portfolio. This is a complex task at the best of times and mergers and acquisitions muddy the waters further. But if they can't generate the visibility needed to accurately report on risk, banks will find it tricky to stand their ground. More and more banks are looking at how they can use technology to generate increased visibility, putting them in the position of being too smart to fail, rather than too big." See FST liquidity risk feature HERE for more.

As Sally Dewar, FSA managing director of risk, asserts: "Adhering to the FSA's client money and asset rules not only ensures greater protection of clients, but also of financial stability as a whole. The creation of our specific unit means that firms need to raise their game as the FSA's focus on this area will continue to intensify."

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