US and UK regulators have fined JP Morgan, a bank with a presence in regions including Asia, $920 million in total for failings associated with heavy losses that were revealed last year.

As expected from widespread reports, UK and US regulators have fined JP Morgan a 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. (To view a list of such miscreants, click here.)

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, JP Morgan’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.