Release Date: 19th September 2013
To access the original FCA document, click here.
Summary
The Financial Conduct Authority (FCA) has imposed a fine of £137,610,000 on JPMorgan Chase Bank N.A. (“JPMorgan”) for significant failings related to the activities of its Chief Investment Office (CIO), specifically regarding the notorious “London Whale” trades. These trades resulted in losses amounting to $6.2 billion in 2012, attributed to a risky trading strategy, poor management of the trading activities, and an inadequate response to critical risk indicators within the CIO’s Synthetic Credit Portfolio (SCP).
The issues were systemic, affecting various levels of the organisation from the trading floor up to the senior management. The FCA identified breaches of multiple Principles for Businesses, including the obligation to conduct business with due skill, care, and diligence (Principle 2), and to maintain effective controls (Principle 3). Furthermore, JPMorgan was found to have compromised market conduct standards (Principle 5) and failed to be open and cooperative with the regulator (Principle 11).
Key failings included JPMorgan’s response to risk limit breaches by questioning the reliability of risk metrics rather than addressing underlying issues, and senior management’s inadequate reaction to emerging problems within the SCP. Additionally, valuation controls were flawed, leading to mismarked trading positions which went undetected due to existing control weaknesses dating back to 2007.
The situation was exacerbated when significant losses accrued, and instead of transparent reporting and corrective action, the bank’s traders attempted to conceal these losses. Senior management also failed to escalate crucial audit findings and did not involve vital control framework parts in a crucial review of the SCP’s valuations. This ultimately led to a misstatement of earnings in the US, which required a restatement in July 2012.
The FCA emphasised that JPMorgan’s actions severely undermined trust and confidence in UK financial markets. The firm settled early in the FCA’s investigation, receiving a 30% discount on the fine, which otherwise would have been £196,586,000.
This case serves as a stark reminder to other firms of the importance of robust risk management systems, transparency, and cooperation with regulators. It underscores the need for firms to have effective controls in place to detect and mitigate risks promptly, and to maintain the integrity of financial markets by dealing openly with regulatory bodies. This incident reinforces the FCA’s commitment to uphold stringent standards and take decisive action to address failures within regulated entities.
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