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While the investment world focuses on Japan today, the news at JP Morgan has failed to make the make the headlines it would have on any almost other day. The Financial Conduct Authority (FCA) has levied a fine of £3,076,200 “for systems and control failings related to its provision of retail investment advice and portfolio investment services” at JP Morgan International Bank (JPMIB).
The bank is already under scrutiny (what bank isn’t?) for its role in the ‘London Whale’ scandal in which the bank lost £3.9 billion. The original levy against the bank was £4,394,694, but because JPMIB cooperated in the investigation and agreed to an early settlement, the bank qualified for a 30% reduction.
Before going any further, I want to emphasize that the FCA found only one JPMIB client out of 1,416 reviewed for whom an unsuitable investment was made. That is good news all around. The fine was not for damages, but for non-compliance issues related to controls and documentation regulations. Having said that, some may be thinking now that the fine is rather heavy since no damage was done. Actually, the failure to comply with regulatory requirements is, technically, a crime. The reason that is a crime is that failure to adequately document and control financial service management systems exposes clients to potentially disastrous risks. The overarching significance of the FCA’s findings is that other investment firms might also be non-compliant. That could lead to disaster.
The type of systemic auditing that the FCA has conducted at JP Morgan is similar to how the International Standards Organization helps ISO-registered companies of all varieties to remain in compliance with their own systemic policies and procedures. One of the principal caveats of an excellent management system is, “If it is not documented, it never happened.” In one fashion or another phrases like “failed to record,” “failed to contain,” “failed to identify,” “incomplete or inaccurate,” or “not retained” are repeated throughout the entire FCA Final Notice.
Just another insight here . . . retention and retrieval of documentation is just as important as the documentation itself. If you claim to have documentation, but can’t find or retrieve it, it is also just like it never happened. Most people are always aware of where their wallet is, and they can find it. If you are a client of an investment service, they should be able to do the same thing with the part of your wallet that you have entrusted to them. Yet the FCA found “a recurring failing” for JPMIB to be able to produce documents defined as mandatory in its own procedures, including application forms, due diligence reports, investment parameters, client interview forms and lists of authorized representatives of accounts.
The serious import of the matter is probably best described in ¶2.5 of the FCA report, where it states that “The FCA regards these failings, including the failure to record and maintain fundamental client information, as significant since they exposed customers to the risk of incorrect advice and unsuitable or inappropriate investments. Poor record keeping gives rise to other risks.”
Under the finer lens of a Skilled Person’s review, “significant gaps in suitability information” were found in 22 of 25 client records. Records were not only found to be out of date, but there were no procedures in place to ensure that records would be kept current, including seven out of 100 that had not been updated for more than three years and seven others that had not been updated for over six years. That’s 14% of the entire sampling with out-of-date records. That’s not a scenario in which I want to entrust my financial investments.
Let me give you one last insight into the gravity and potential magnitude of the systemic breakdown at JP Morgan. “The FCA considers that the total revenue generated by JPMIB during the Relevant Period is indicative of the harm or potential harm caused by its breach in this case. JPMIB’s total relevant revenue for this period was £97,659,882.”
To keep it all in perspective, the FCA also acknowledged that the failure was not intentional, but rather that it was a matter of negligence. The problem is that if you or I lost our money at JPMIB, we really wouldn’t care if it was intentional or if it was by negligence. The results would still be the same.
You can worry about Japan. I’m more concerned about who is handling my investments and how they are doing it.
