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FCA Harpoons JPM for the London Whale Trades

Thursday, 12 December 2013

JP Morgan Chase has agreed to pay four regulators a total of £572m in fines in relation to a $6.2bn loss incurred as a result of the "London Whale" trades. The UK’s Financial Conduct Authority (FCA) will receive £138m of this amount.

This is the second largest banking fine to be issued by UK regulators and serves as a warning to those carrying out regulated activities.

Why Was Such a Large Fine Issued?

According to the FCA the fines are a result of JP Morgan’s conduct which "demonstrated flaws permeating all levels of the firm” - from junior staff to senior levels of management.

Such institutionalised patterns of behaviour are one of the primary issues that the FCA exists to prevent. Failures of regulation at this level clearly undermine confidence in the UK’s financial markets.

Indeed, regulators are under pressure more than ever before to ensure that firms implement effective risk management processes and encourage responsible behaviour. Fines seek to not only act in a punitive capacity but as deterrence too.

Are the Fines Likely to be Effective?

As John Coffee a specialist in Corporate Governance notes, the fines are more like to impact shareholders who will have already been directly affected by the initial 6.2bn USD loss.

Indeed, large fines will affect the pay-out of dividends as well as stock value and it is thus the victims of the initial malpractice who will bear the direct financial loss associated with these punitive measures. The current actions of the financial regulators may not therefore address the full extent of the problem.

Not only will the fines impact the victims, they seem to excuse negligent employees too with little personal liability for those involved. Indeed, little was done to identify the responsible senior individuals.

It would seem regulators are yet to operate in a way that encourages senior staff accountability despite the fact it was the actions of employees that resulted in the ‘Whale trades’.

Thus it could be that more regulation or tougher implementation of existing regulation is likely, with a greater focus on the personal liability of employees.

What is Missing?

As the BBC’s Robert Peston noted, while the fines may demonstrate that the regulatory guard dog can bite, there is some way to go before financial regulation acts to appropriately guide behaviour.

It is speculated that regulators could have done more to prevent the sizeable loss, if they had had better oversight of JP Morgan’s Chief Investment Office and the synthetic credit portfolio which generated the huge loss. However, at the time of the losses, the structure of UK regulatory system meant the formal role of the UK regulator was far from clear. While the portfolio was managed and traded in London, it was under a subsidiary of an American firm, overseen by the US Federal Reserve.

It seems that the JP Morgan ‘Whale’ case only highlights even greater room for improvement within banking practices which in the present environment is likely to equate even more regulation. For specialist advice contact James Crighton or telephone 0207 611 4848.

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