The Financial Services Authority, the UK financial regulator that may lose some of its powers by the new coalition government, has fined JP Morgan Securities £33.32 million ($49 million) for failing to segregate client money appropriately.

This is the largest fine ever imposed by the FSA, which said that JP Morgan worked “constructively” with the regulator. JPMorgan yesterday declined to comment on this issue when contacted by this publication.

Between November 2002 and July 2009, JP Morgan Securities failed to segregate the client money held by its futures and options business with JP Morgan Chase Bank, the regulator said in a statement.

"JP Morgan Securities 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 client money involved in this breach,” said Margaret Cole, the FSA director of enforcement and financial crime.

The error occurred following the merger of JP Morgan and Chase, remaining undetected for nearly seven years. The firm held client assets overnight in an unsegregated account with JP Morgan Chase Bank, instead of in a segregated money market account, thus putting billions of client money at risk in case of the firm’s insolvency.

During this time, the client money balance held in the unsegregated account at one point – in October 2008 - reached $23 billion.

FSA regulation requires firms to keep client money separate from the firm's money in segregated accounts with trust status. This is to protect client assets in case of the firm's insolvency. In the case of JP Morgan, no clients suffered any losses due to the segregation error.

“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," Cole said.

Setting the penalty level, the FSA accepted that the misconduct was not deliberate and that the firm self-reported discovering the issue, as well as that no clients suffered any losses due to the error and that there was no incorrect financial reporting. In the end the firm was fined the equivalent of 1 per cent of the average amount of unsegregated client money held.

“The firm worked constructively with the FSA in the course of its investigation and agreed to settle at an early stage. In doing so it qualified for a 30 per cent discount,” Cole said. Without the discount, the firm would have been fined £47.6 million.