JPMorgan fined record £33.3m for failing clients

The City of London was on tenterhooks last night as it emerged that the Financial Services Authority (FSA) is preparing to hit a string of banks with eight-figure penalties after fining JPMorgan a record £33.3m fine for failing to keep as much as $23bn (£16bn) of its clients' funds separate from its own money.

The penalty is by far the biggest the watchdog has imposed – nearly twice the £17m sum that Shell was ordered to pay in 2004 for mis-stating its reserves. Quite apart from the financial impact, the fine will come as a huge embarrassment to JPMorgan, one of the aristocrats of Wall Street, which has not previously been penalised by the UK regulator.

The FSA said the "oversight" at the futures and options business of JPMorgan Securities (JPMS) meant that funds which should have been held in trust for corporate clients ended up mixed in with the bank's own cash. That could have presented those clients with a huge problem had JPMorgan run into difficulties and been declared insolvent. Instead of being able to recover their funds they would have become unsecured creditors.

Regulators around the world were shocked at the effect on the markets of the failure of Lehman Brothers, where it subsequently emerged that clients' money was not kept properly separate. That amplified the effect of the insolvency and helped to spread financial contagion around the world.

Margaret Cole, the FSA's director of enforcement and financial crime, said: "JPMS 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. 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, JPMS failed to do so. This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated."

The fine is equivalent to 1 per cent of the average amount of money that was not properly separated – it varied from $1.96bn to the maximum $23bn – but was reduced by 30 per cent because JPMorgan settled early. The bank had alerted the FSA to the problem.

The watchdog has been determined to force improvements in banking systems and processes in the wake of the credit crisis in an attempt to limit the risks of contagion. It has twice written to companies to warn them they need to tighten procedures.

However, the case against JPMorgan could have implications beyond the company: the separation of client money has to be signed off by its auditors and it is understood PricewaterhouseCoopers did do this.

The accountant would not comment yesterday, citing "client confidentiality". However, the FSA may report it to the Financial Reporting Council or the Institute of Chartered Accountants if it feels there are sufficient grounds.

JPMorgan made no public response to the £33.3m penalty or the FSA's criticism. However, in an internal email, Daniel Pinto, the chief executive of JPMorgan Securities, told staff: "While the error is regretful, I am proud of the manner in which the firm has conducted itself since discovering it."

The fine has been levied at a time of continued and potentially damaging uncertainty about the FSA's future. The Chancellor, George Osborne, is not expected to clarify this until his Mansion House speech later this month.