Recently, we have been seeing a growing need for independent risk functions, an indicator that competition for investment and operations risk management as well as compliance talent is on the rise across the globe. It’s not surprising considering today’s environment.
After JP Morgan’s “London Whale” debacle—where traders in its London office lost more than $6 billion on derivative bets—the bank vowed to spend $4 billion to hire 5,000 new risk and compliance personnel–3,000 for control staff to work on legal and regulatory matters and 2,000 to work inside business units. JP Morgan’s financial woes along with the financial meltdown of 2008 are leading regulators to call for increased scrutiny, sparking the need for greater investment and operational oversight.
JP Morgan has publically accepted responsibility for its loss, attributing the problem to a lack of appropriate resources.” The group at JP Morgan responsible for double-checking the traders’ estimated profit and losses was so ‘under-resourced’ and ‘unequipped,’ authorities said, that it consisted of a single employee,” writes Monica Langley and Dan Fitzpatrick of The New York Times.1
In addition to hiring new compliance and risk personnel to address understaffing issues, JP Morgan is also entrusting these newcomers with greater autonomy. For instance, the bank recently “shifted the reporting lines so that its top compliance officer reports to the bank’s chief operating officer, not the general counsel. The new structure was requested by regulators to provide compliance with more stand-alone authority—eliminating potential conflicts of interest that could lead to trading mishaps.2
Since fiascos arising out of risky business can cost a large firm billions of dollars in penalties, legal fees, and investment income, in addition to damaging its brand, risk management staff is worth its keep.
1. Langley M., Fitzpatrick, D. Embattled J.P. Morgan Bulks Up Oversight. The New York Times Web site. Available at: http://online.wsj.com/article/SB10001424127887324755104579071304170686532.html. Accessed September 30, 2013.
2. Silver-Greenberg, J., Protess, B.. As Inquiries Persist, JP Morgan Loses Favor. The New York Times Web site. Available at: http://dealbook.nytimes.com/2013/09/19/jpmorgan-chase-agrees-to-pay-920-million-in-fines-over-trading-loss/. Accessed September 30, 2013.