JP Morgan International Bank (JPMIB) is a wealth management firm within the JPMorgan Group. Although the overwhelming majority of its clients are classified as retail, a large proportion are in fact financially sophisticated.
As we have previously reported (see Enforcement Watch 8 "Wealth Managers very much on the FSA radar"), the FSA has been conducting a thematic review into the wealth management sector with a particular focus on the suitability of advice. As part of this review, JPMIB was visited during 2010 and 2011. The (then) FSA identified concerns and required JPMIB to appoint a skilled person under s.166 FSMA, to review the adequacy and effectiveness of its systems. In essence, the skilled person determined that whilst there were flaws in JPMIB's systems (summarised below) none of the 25 client files reviewed in fact contained unsuitable advice. The failures in JPMIB's systems were in practice compensated for by the knowledge and record keeping of those running the client files as well as the level of sophistication of its clients. JPMIB was found to be in breach of Principle 3 (management and control) and SYSC 9.1.1R (record keeping). Whilst the absence of any impact on JPMIB clients was taken into account in setting the level of penalty, this did not prevent a penalty being imposed based on 5% of JPMIB's profits in the Relevant Period (around two years from January 2010). The deficiencies in the JPMIB systems included:
- Gaps in the recorded suitability information, such as clients' financial circumstances and ability to bear loss. Information was either not documented or not updated.
- Issues with the electronic information management system (Argus), which prevented certain information being entered and did not require key fields to be completed.
- Inadequate staff training regarding the need to obtain and record suitability information.
- Inadequacies in the suitability reports sent to clients.
- Insufficient information being provided to JPMIB's management, which prevented them from identifying the systemic issues noted above.
This was a case of failure of record keeping, rather than of failure of suitability. Indeed, a review of some 1416 client files, reviewed by a third party that JPMIB was required to instruct, found only one instance of unsuitable advice. Nevertheless, the regulator was clearly concerned and handed down a fine of just over £3m.
Apart from showing the real focus of the FCA on wealth managers, what is perhaps most interesting about the case is the help it gives in understanding the FCA's thinking on penalty setting. This was a case where penalty was set according to the new penalty setting regime (see Enforcement Watch 1 "Harsher penalty setting introduced"). Under that regime, there is a five step process.
- There is a starting point which can be (as it was here) based on a percentage of relevant revenue. There are five levels of relevant percentage depending on the seriousness of the breach, with level 1 being the least serious. Relevant factors are impact of the breach, nature of the breach, and whether the breach was deliberate or reckless. The JPMIB breaches were found to be of a level 2 seriousness. This appears to have recognised the serious nature of the breaches, but that the impact of them was low and that they were not committed either deliberately or recklessly.
- One adjustment to that figure can be made according to aggravating and mitigating factors. In this case, the aggravating factors were essentially that the FSA had heightened awareness around wealth management issues and that the FSA had previously fined another member of the group (although not relating to retail investment advice). However, the FCA adjusted the figure down by 10%. It did this due to the "very high level of co-operation", the prompt and considerable steps taken to resolve the issues and the extensive past business review. This shows the very real credit the FCA will give in appropriate cases for positive behaviour.
The fine was then reduced to just over £3m for early settlement.