FSA bares its teeth as cash protection failings bring record fine for JP Morgan

The financial regulator issued a 33.32 million levy against JP Morgan Securities after it failed to segregate clients' cash in its futures and options business from its own funds. The error covered a period of nearly seven years up to July 2009, and followed the merger of JP Morgan and Chase in late 2000.

The FSA has stepped up oversight in this area following the collapse of Lehman Brothers in 2008. The bank's demise kicked off a chain of events that brought the global banking industry to the brink of collapse, putting pressure on regulators to find safeguards to prevent similar events in the future.

The City watchdog said that had New York-based JP Morgan become insolvent at any time during the period of misconduct, there was a risk that clients' money would have been lost. The amount involved varied from $1.9 billion (1.3bn) in 2002 up to $23bn (15.7bn) in 2008, and was mainly cash from other banks and City firms.

Margaret Cole, the FSA's director of enforcement and financial crime, said the record penalty reflected the amount of client money involved in the breach. The fine nearly doubles that handed to Royal Dutch Shell for market abuse in 2004.

"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," Cole said. "Firms need to take notice of this action – we have several more cases in the pipeline."

The FSA emphasised that no clients of JP Morgan lost any cash as a result of the breach, and added that there was no incorrect financial reporting during the period.

The level of the fine – equivalent to 1 per cent of the average amount of unsegregated client money – took into account the fact that the misconduct was not deliberate and was reported by JP Morgan itself in July of last year. Co-operation and an early settlement to the investigation earned JP Morgan a 30 per cent discount on the penalty, which would have otherwise amounted to 47.6m.

A spokeswoman for the FSA confirmed that more cases involving client protection in the City would be revealed in the coming "weeks and months". However, she declined to say if any of these would be of the same scale as that at JP Morgan.

In April, the City regulator handed out the largest fine ever imposed on an individual in connection with improper market conduct by a senior trader at the London investment banking arm of Deutsche Bank. 1German-headquartered Deutsche paid a 6.3m penalty, while David Maslen, its former head of European cash trading, was fined 350,000.