Regulator fines Morgan Stanley £1.4m for risk failure

The Financial Service Authority (FSA) fined Morgan Stanley £1.4m for systems and controls failures after a trader deliberately covered up losses of $120m last year.

The regulator also banned Matthew Sebastian Piper, a former proprietary trader at the firm, from the financial industry on the grounds that ‘he is not a fit and proper person’. Piper was also fined £105,000.

Morgan Stanley failed to effectively use the controls it had in place for dealing in illiquid financial products. It did not ensure adequate supervision of Piper's books and failed to prevent or detect the cover up ‘in a timely manner’.

The firm also failed to respond quickly enough to changing market conditions (namely an increase in volatility and a decrease in liquidity) by making adjustments to its existing systems and controls which would have enabled it to detect the cover up, added the FSA.

Margaret Cole, FSA director of enforcement, said: ‘Market confidence is likely to be damaged by sudden and unexpected write downs and revaluations of securities. Firms must take care to ensure their traders operate within a proper control environment. Financial instruments must be priced correctly by traders, particularly in more challenging conditions and when it comes to illiquid products.’

“Morgan Stanley failed to ensure adequate supervision of Piper's books and failed to prevent or detect the cover up in a timely manner.

FSA

‘Piper has been banned because his misconduct was deliberate, frequent and repeated over a six-month period. He was a senior and experienced trader who held a position of trust at the firm. This was clearly a serious breach of the standards of behaviour we expect of approved persons.’

‘Firms must take care to allocate sufficient resources to supervise adequately those activities that they choose to undertake. Where a firm fails to act accordingly the FSA will take action against the firm.’

Morgan Stanley agreed to settle at an early stage of the FSA's investigation and therefore qualified for a discount in the fine, reported the FSA. Without the discount the fine would have been £2m.

Piper also agreed to cooperate and received a discounted fine.

On discovery of the cover up the firm suspended Piper and commissioned a review of its controls. The review identified serious weaknesses in the implementation, operation and management of Morgan Stanley's systems and controls.