AMERICAN investment bank JP Morgan Chase has been fined £572 million by regulators for serious failings over the “London Whale” trading scandal.
The high-risk trading strategy last year triggered almost £4 billion of losses and sent shock waves through financial markets.
Regulators said the bank had admitted wrongdoing for the scandal, which originated from its chief investment office in London.
It saw traders bet huge sums on complex financial instruments and cover up losses when trades went wrong and problems escalated.
The fine was made up of a £137m penalty by the City’s Financial Conduct Authority (FCA) and those totalling $700m (£435m) by three American regulators, including the US Federal Reserve.
The FCA said JP Morgan’s “extremely serious failings” undermined confidence in UK markets.
Trader Bruno Iksil, who was dubbed the London Whale because of the size of his trades, has agreed to testify against his colleagues and is reported to have been granted immunity by American prosecutors.
The bank was criticised for a high-risk trading strategy, weak management, a poor response to the problems and failing to co-operate with regulators.
The FCA’s director of enforcement and financial crime, Tracey McDermott, said JP Morgan “failed to get a proper grip on the risks its business poses to the market”.
She said: “As things began to go wrong, the firm didn’t wake up quickly enough to the size and the scale of the problems.
“What is worse, they compounded this by failing to be open and co-operative with us as their regulator.”
Professor Andre Spicer at Cass Business School, said the fine “hammers home the cost of bad behaviour”.
He said: “It reminds banks that they desperately need to change their ways or risk taking a huge hit not only to their bottom line, but also their reputation. With its recent profits, the bank can afford the fine. But the damage to its reputation could be more costly in the long term.”
The FCA said its fine would have been £197m if the bank had not agreed to settle at an early stage.
The UK penalty is the second-biggest by the City regulator, after Swiss bank UBS was ordered to pay £160m last December for rate-rigging.
In the US, JP Morgan was also fined by the US Securities and Exchange Commission and the Office of the Comptroller of the Currency.
Regulators said the JP Morgan trading strategy was so risky and the bets so large that it faced heavy losses even from a small market move.
But despite this, they said the bank assumed the numbers indicating a breach of risk limits were unreliable and simply approved limit increases.
And when losses began to mount as financial markets moved against the bets, traders shifted the goalposts by understating them, marking their positions in a “noticeably favourable way”.
In July last year, the bank finally admitted losses of £3.6bn in its so-called synthetic credit portfolio (SCP), managed from London. By the end of last year that had swollen to £3.9bn.