Investment banking giant JP Morgan was fined a record £33.3 million today over its failure to ring-fence billions of pounds of client money.
The fine - the largest ever imposed by the Financial Services Authority (FSA) - was imposed after JP Morgan failed to segregate client cash from its own money during a period that spanned nearly seven years.
The FSA said if JP Morgan had become insolvent during this time, substantial amounts of client money would have been at risk of loss.
Its fine represented just 1 per cent of the average amount of money unsegregated, according to the FSA.
Today's fine surpasses the mammoth £17 million penalty imposed on Royal Dutch Shell in 2004 for market abuse.
Margaret Cole, FSA director of enforcement and financial crime, said the penalty sent out "a strong message" to firms that they need to segregate client money.
Rules regarding client money have come to the fore following the collapse of Lehman Brothers during the financial crisis.
Its demise brought the global banking industry to its knees, serving as a stark reminder of the implications of a bank failure on the financial system.
The FSA sent out a warning shot to the industry last year after discovering that a number of firms had not been segregating client money adequately.
It has set up a new unit within the regulator to specifically supervise client money and added it had "several more cases in the pipeline".
But the FSA stressed that JP Morgan self-reported the breach - a move that saw its fine reduced by 30%. It would otherwise have faced a fine of £47.6 million.
Ms Cole said: "The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected. Despite being one of the largest holders of client money in the UK, JP Morgan Securities failed to do so.
"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."
JP Morgan alerted the FSA after discovering last July that its UK arm JP Morgan Securities had not been segregating client money held overnight by its futures and options business since November 2002.
The error happened following the merger of JP Morgan and Chase Manhattan in late 2000, after which the bank had to integrate a large number of different systems and processes.
During the time of the breach, JP Morgan held anywhere between 1.9 billion US dollars (£1.3 billion) and 23 billion dollars (£15.7 billion) of client money - generally cash from other banks and City institutions.
The FSA assured that no clients of JP Morgan suffered losses as a result of the breach, nor was there any incorrect financial reporting by the bank.
But the regulator said the potential loss of such large amounts of client money posed a significant threat to the wider banking system.
Sally Dewar, FSA managing director of risk, said: "It is crucial that firms are compliant with the FSA's client money and assets rules.
"Adhering to these rules not only ensures greater protection of clients but of financial stability as a whole. The creation of a specific unit means that firms need to raise their game as the FSA's focus on this area will continue to intensify."
JP Morgan declined to comment.Reuse content