JPMORGAN’S securities arm has been fined £33.32 million (€40 million), the largest penalty levied by the UK financial regulator so far, for failing to protect billions of dollars of client money by keeping it in segregated accounts.

At the height of the financial crisis, JPMorgan’s futures and options business was keeping up to $23 billion (€18.9 billion) in institutional client money mixed up with its own in an unsegregated account at the larger bank.

Had the bank run into financial difficulties, clients such as pension funds and hedge funds would have been at risk of losing their money.

The administrators of Lehman Brothers, the failed US investment bank, are still trying to disentangle its books due to similar problems, and the judges handling Lehman-related lawsuits have criticised the UK Financial Services Authority’s (FSA) supervision of client money.

This fine by the FSA, which is twice as large as the previous record of £17 million paid by Royal Dutch Shell, is part of a broader investigation into how banks and brokers protect client money.

The regulator is concentrating on the wholesale area, where the potential for one failure to bring down other institutions is greater.

FSA enforcement director Margaret Cole said: “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 – we have several more cases in the pipeline.”

JPMorgan declined to comment. The bank discovered the issue in July 2009, reported it to the FSA and received a discount for early settlement, the regulator said.

The fine represented 1 per cent of the average amount of client money held by the business during the period.

“While the error is regretful, I am proud of the manner in which the firm has conducted itself since discovering it,” David Pinto, head of the bank’s securities unit, said in an e-mail to staff seen by the Financial Times. – (Copyright The Financial Times Limited 2010)