Compliance
JP Morgan Hit With $920 Million Fine From US, UK Regulators Over Losses

As expected from widespread reports, UK and US regulators have fined JP Morgan at total of $920 million for “serious failings” relating to trades carried out by the firm’s Chief Investment Office and disclosed last year.
As expected from widespread reports, UK and US regulators have
fined JP Morgan
at total of $920 million for “serious failings” relating to
trades carried out
by the firm’s Chief Investment Office and disclosed last year.
The bank has agreed to settle actions brought by the US
Securities and Exchange Commission, who imposed a financial
penalty of $200
million and required the firm to admit wrongdoing; the Office of
the
Comptroller of the Currency, who imposed a financial penalty of
$300 million,
and the Federal Reserve, who imposed a financial penalty of $200
million. In addition, the UK Financial Conduct
Authority fined the bank $220 million.
The fines, some of the highest ever for such behaviour, have hit the reputation of a bank that, until the losses had been revealed, had been seen as one of the few US banks to have emerged from the 2008 financial crisis with its status enhanced. The fine adds to those imposed on other firms for issues such as rigging interbank interest rates, for example.
Jamie Dimon, chairman and chief executive at the bank, said: "We
have
accepted responsibility and acknowledged our mistakes from the
start,
and we have learned from them and worked to fix them. We will
continue
to strive towards being considered the best bank - across all
measures -
not only by our shareholders and customers, but also by our
regulators.
Since these losses occurred, we have made numerous changes that
have
made us a stronger, smarter, better company."
FCA
“JP Morgan’s conduct demonstrated flaws permeating all
levels of the firm: from portfolio level right up to senior
management,
resulting in breaches of Principles 2, 3, 5 and 11 of the FCA’s
Principles for
Businesses - the fundamental obligations firms have under the
regulatory
system,” the FCA said in a statement today.
“The breaches occurred in connection with the $6.2 billion
trading losses sustained by CIO in 2012. These losses arose as a
result of what
became known as the “London Whale” trades, and were caused by a
high risk
trading strategy, weak management of that trading and an
inadequate response to
important information which should have notified the firm of the
huge risks
present in the CIO’s Synthetic Credit Portfolio,” the FCA
continued.
Tracey McDermott, the FCA’s director of enforcement and
financial crime said:
“When the scale of the problems at JPMorgan became apparent,
it sent a shock-wave through the markets. Maintaining the
integrity of markets
is a key part of our wholesale conduct agenda. We consider
JPMorgan’s failings
to be extremely serious such as to undermine the trust and
confidence in UK financial
markets.”
“This is yet another example of a firm failing to get a
proper grip on the risks its business poses to the market. There
were basic
failings in the operation of fundamental controls over a high
risk part of the
business. Senior management failed to respond properly to warning
signals that
there were problems in the CIO. 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,”
McDermott said.
The FCA explained that the trading strategy for JP Morgan’s
SCP in 2012 caused the size of its positions to grow so large
that it was at
risk of substantial losses from even a small adverse market move.
However the
firm’s response to breaches of relevant risk limits was to assume
the numbers
indicating a breach were unreliable or to doubt the accuracy of
the methodology
for risk measurement, and to approve temporary limit increases
without adequate
analysis of the root cause of the breaches, it said.
“When significant losses began to mount during 2012,
JPMorgan’s traders sought to conceal them by mis-marking
positions and through
misconduct in the market in which the losses were occurring.
Mis-marking went undetected in 2012 owing to
flaws in valuation controls, some of which had existed since
2007,” the FCA
said.
The regulator said the bank’s failings extend to its senior
management’s response to the problems with the SCP in the second
quarter of
last year. When preparing for a regulatory filing of
first-quarter net income
on 10 may 2012, the firm’s senior management had commissioned a
review of the
SCP’s valuations. However the review
failed to uncover the extent of the valuation problems present in
the SCP, the
FCA said.
“Senior management did not take sufficient steps to ensure
that all crucial information reached the appropriate decision
makers; findings
made by Internal Audit were not escalated to senior management
and therefore
not considered as part of the review. In addition, the firm’s
senior management
did not involve key parts of the firm’s overall control framework
in the
review,” it said.
JP Morgan filed a statement of its earnings in the US on 10
May
2012 which over-valued the SCP’s positions.
It subsequently filed a restatement on 13 July 2012. More
effective
analysis of the information available as at 10 May 2012 may have
prevented the
need for this restatement.
JP Morgan agreed to settle at an early stage of the FCA’s
investigation. JP Morgan therefore qualified for a 30 per cent
discount under
the FCA’s settlement discount scheme.
Without the discount the fine would have been £196,586,000.