London Whale beached by regulator

London Whale beached by regulatorThe Financial Conduct Authority (FCA) has imposed a massive fine in respect of the so-called ‘London Whale’ trades.

The financial services regulator fined Achilles Macris a total of £792,900 for failing to be open and co-operative with the FCA.

Macris was Head of CIO International for JPMorgan Chase Bank, N.A. in London.

In that role he was responsible for a number of investment portfolios, including the Synthetic Credit Portfolio, at the time of what became known as the ‘London Whale’ trades.

Because he was the main point of contact with the regulator, as an Approved Person he was required to deal with the FCA (and their predecessor, the FSA) in an ‘open and cooperative’ way.

However, the FCA ruled that Macris failed to inform them about concerns with the Synthetic Credit Portfolio between 28th March 2012 and 29th April 2012. As a result, he failed to meet the standards expected of an Approved Person under Statement of Principle 4.

Commenting on the fine, Mark Steward, director of enforcement and market oversight at the FCA said:

‘A failure to communicate openly with us can affect the well-running of markets and cause unnecessary harm to investors, especially in times of financial stress or crisis.

‘Regulators need open communication with firms so that better decisions can be made sooner.

‘Mr Macris should have explained the position more squarely especially when he knew the Synthetic Credit Portfolio’s losses had worsened.’

London Whale trades

According to the FCA, the Synthetic Credit Portfolio began to suffer significant losses from the beginning of 2012.

On 23rd March 2012, the front office was instructed that no further trades should be executed on the portfolio until discussions had taken place.

Mr Macris subsequently asked that daily risk reports for the Synthetic Credit Portfolio be produced and in the following days took other measures, such as requesting assistance from outside CIO and arranging daily progress meetings with CIO Risk and the front office.

Despite these measures the Synthetic Credit Portfolio continued to suffer losses.

On 28th March 2012, Mr Macris attended a supervision meeting with the regulator at which CIO International and the Synthetic Credit Portfolio were discussed.

The regulator was updated on both positive and negative developments relating to the Synthetic Credit Portfolio, including that it had made a loss of $200m, and that it had experienced rebalancing problems, but was told that it was now balanced and did not require additional trading.

According to the FCA, Mr Macris did not provide the regulator information about the full extent of the difficulties that the Synthetic Credit Portfolio was then facing or take steps to ensure that the regulator understood there were causes for concern with the portfolio.

On 10th April 2012, Mr Macris took part in a telephone call with the regulator which was set up to try to correct any inaccurate impression that may have been given by the publication of articles about the ‘London Whale’.

By the time of the call, Mr Macris was aware that the position of the Synthetic Credit Portfolio had worsened and its losses had increased.

The call provided Mr Macris a further opportunity to provide information about concerns with the portfolio and the heightened response being adopted to address them. Mr Macris did not do so, according to the FCA.

Instead, Mr Macris allowed an inaccurate impression to be given that there had been no material changes since the supervision meeting and that there were not wider causes for concern with the Synthetic Credit Portfolio.

Beached by regulator

The FCA says that Mr Macris should have appreciated that, by failing to inform the regulator during the meeting and the call of the causes for concern and by allowing the regulator to be reassured concerning the position of the Synthetic Credit Portfolio, the message delivered was not an accurate reflection of the state of the Synthetic Credit Portfolio.

They say that at the very least a high level indication that there were causes for concern during the meeting, the call or at any time before the 29th April 2012 would have provided them with the opportunity to follow up with questions about the nature of the concerns and form their own assessment of the position.

It would also have encouraged other staff to be open and cooperative in providing information in relation to their specific areas of expertise.

Macris received a 30% discount on the fine, which would otherwise have been £1,132,747.

Our view

As managing director of an authorised and regulated firm, I always have mixed feeling when I read about substantial financial penalties imposed on other firms or regulated individuals by the FCA.

On one hand, these significant fines paint financial services in a bad light, adding to the distrust often felt by those looking in on our profession.

It’s important to keep in mind that the vast majority of retail financial services firms and individuals do put their customers first and behave in an ethical manner, following the rules and principles established by the FCA.

However, it is positive to see individuals facing personal financial consequences when they break the rules of the regulator.

There is undoubtedly an ongoing cultural problem in the UK banking sector, which seems to place profits above people.

We need a financial services regulator which is firm and fair when it comes to enforcing its rules, with senior people at large firms paying the financial consequences for their decisions.

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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