Accountant gets record penalty for allowing JP Morgan to appear to comply with rule demanding that client money is kept separate from bank's own funds

PricewaterhouseCoopers has been fined a record £1.4m and given a rare "severe reprimand" by the accountancy regulator over the failure of investment bank JP Morgan to safeguard billions of pounds of clients' assets.

The Accountancy and Actuarial Discipline Board (AADB) said PwC had admitted its standards had fallen short after it allowed the UK securities arm of JP Morgan to appear to be complying with rules requiring client money to be kept separate from the bank's own funds between 2002 and 2008.

The fine against PwC, which had admitted in August to years of mistakes, was eventually determined after a discussion among regulators which had suggested the penalty could be as high as £44m.

PwC had been required to submit a report to the FSA on whether JP Morgan complied with its client money rules and had the internal systems to ensure this was the case. While PwC had done so for each of the seven years in question, JP Morgan had not, in fact, been complying with the rules. The errors meant that an average of £5bn of client money was at risk each day.

The AADB said: "PwC admitted that it failed to obtain sufficient appropriate evidence on which to base these opinions and failed to identify and consequently did not report that [JP Morgan] had not at all times held client money separate from the firm's money and/or had not taken the necessary steps to ensure that client money was held at all times in an account identified separately from any accounts used to hold money belonging to [JP Morgan] , in breach of the client money rules."

The action by the accountancy profession comes after JP Morgan was fined £33m by the Financial Services Authority – the largest penalty imposed by the regulator – in June 2010 for failing to segregate client money from its own funds over a seven-year period.

Lack of segregation became a key issue for the FSA after Lehman Brothers collapsed in September 2008. It was discovered to have mixed together its own funds and those of its clients, leaving customers such as hedge funds with concerns about their assets.

The AADB said its tribunal found that PwC had committed misconduct in respect of each allegation in the disciplinary complaints that had been put before it, and found the misconduct to be "very serious". It imposed a "severe reprimand" on PwC. "A global organisation with the resources of PwC … should never place itself in a position in which an elementary inquiry as to the final destination of client money is not properly answered, and no check is made of the banker holding client money as to its treatment of money, whether the banker is an entirely separate entity or an associate company in the same group," it said.

The fine of £1.4m – reduced from £2m because PwC co-operated with the AADB investigation– is the biggest levied by accountancy bodies in the UK and surpasses the £1.2m of penalties related to the auditors of companies connected to Robert Maxwell. However, that £1.2m figure would now amount to £1.6m if adjusted for inflation in the intervening period.

Penalties more usually range from £17,000 to £500,000 and more often are connected to the size of the audit fee collected by the accountancy firm.

But the decision by the tribunal showed that on this occasion it had considered whether the fine should be as high as £44m. PwC had argued for a £500,000 fine.

PwC said: "We are pleased that this matter has now been concluded. We regret that one aspect of our work on the private client money report to the FSA fell beneath our usual high standards. When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area."