JPMorgan – Yet another Conflict of Interest Problem

So much for shiny, new Codes of Conduct.

Tidying up before the end of the financial year, JPMorgan Chase and the Securities and Exchange Commission (SEC) and the Futures Trading Commission (CFTC), agreed a fine of $307 million on the company and unusually an admission of wrongdoing [1].

It is a sign of the times that a fine of a third of a billion dollars for misconduct hardly rates a mention in the press these days. There was a time (not too too long ago) when $300 million was a lot of money?

The SEC stated that the fine was because JPMorgan “breached its fiduciary duty to [its wealth management] clients by failing to adequately disclose conflicts of interest”, in this instance by funneling clients’ investments into funds which were more advantageous to the bank than to its clients.

The CFTC argued that “investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank”.

Business as usual, a cynic might mutter?

A JPMorgan spokesperson brushed the transgressions off as relatively minor disclosure problems (which were “unintentional”) [2]. At the next annual meeting, JPMorgan investors might well ask why they had to pay $ 300 million for what was claimed to be a minor operational matter. But, of course it wasn’t!

The dates of the offenses unearthed by the regulators are enlightening – from 2008 until August 2015 (just a few months ago).

Following an avalanche of fines for misconduct during the Global Financial Crisis, the manipulation of the LIBOR and FX benchmarks, and the Whale and Madoff scandals [3], JPMorgan appeared to turn over a new leaf.

In June 2013, JPMorgan published its brand new Code of Conduct, titled, ‘Integrity: It starts with you’. [A cynic might grumble ‘better late than never- I suppose’].

The new Code of Conduct is a very impressive, well-written document – aspirational and inspirational. In the introduction, the CEO, Jamie Dimon, wrote that “the core concept behind our Code of Conduct is that no one at JPMorgan Chase should ever sacrifice his or her integrity, whether for personal gain or for a perceived benefit to the Company’s business. Harm to our reputation affects the entire Company and is enduring”. Very fine words indeed.

Given that the new Code was only published in 2013 and even though the bad behaviour continued until recently, one might be tempted to give the bank the benefit of the doubt in this instance – it is after all a huge organization.

But JPMorgan’s management made a huge noise about their brand new Code of Conduct with the accompanying ‘How we do Business’ principles and how staff were being trained and interestingly certified in the new approach to “Our Shared Responsibility”.

In his letter to shareholders that accompanied the bank’s 2014 annual report [4], the CEO bragged that the bank had conducted a “substantial amount of ongoing training and certification, from the Code of Conduct for all employees to the Code of Ethics [for all senior finance professionals including the CEO]”.

It may be too early to say that the effort to change JPMorgan has not worked but the reaction of the bank to the fines was not comforting. Even though the settlement had been in the pipeline for months JPMorgan did not immediately publish a press release on the topic (I guess $300 million really is a rounding error?).

Heads have remained firmly upon shoulders and so far, as the Assistant US Attorney General quipped, the “VP in charge of going to jail” has not yet been identified.

At the very least, the bank needs to give an assessment of how effective their expensive new Code of Conduct has been.

[As an aside, it is instructive to read JPMorgan’s latest quarterly (10-Q) report to the SEC, which has no less than 7 pages of summaries of the numerous ongoing litigation in which the bank is involved.]

The Open Compliance and Ethics Group (OCEG), a not-for-profit group that aims to improve corporate governance standards, identifies what it calls the ‘Code of Conduct Conundrum’ [5] in which firms spend considerable time and effort crafting codes of conduct but do not understand nor measure what value such codes actually have. If corporate Codes of Conduct are constructed merely to comply with regulations, they are little more than an expensive waste of time.

This particular scandal (like the recent one at Barclays [6]) should raise concerns as to how such codes are viewed in large companies such as JPMorgan. Human Resources (HR) professionals construct beautifully written Codes of Conduct and bemoan the fact that if only staff were to read and ‘live’ them the culture would change and everything would be so much better.

JPMorgan has appeared to be working hard to educate its staff in its new Code of Conduct but the jury is still out, if the tardiness of the firm’s press release are any measure. We have no evidence either way that the training may or may not have made a difference elsewhere in JPMorgan. But we have evidence from banking scandal after banking scandal that Codes of Conduct are not cutting through to real people.

A new approach to Codes of Conduct is needed [3].

People Risk Management

The risk that an employee or group make bad decisions is a People Risk as it can lead to significant losses even the bankruptcy of the firm. In this case decisions to make investments that disadvantaged customers has resulted in a considerable fine and significant damage to the reputation of JPMorgan with its private banking clients.

This blog is one of a planned series that will discuss facets of People Risk in general and bad Decision-Making in particular [3]. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.

[1] See SEC report

[2] See Reuters

[3] See Blacker and McConnell, 2015, ‘People Risk Management’, Kogan Page, London

[4] JPMorgan 2014 ‘Letter to Shareholders’ ‘

[5] See ‘The Code of Conduct Conundrum’ at

[6] See ‘Barclays – Another Code of Conduct failure’

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s