Pension funds must cooperate on engagement to ensure banking institutions showing “little remorse” over multi-billion-dollar fines are held to account, the CIO of the UK’s National Employment Savings Trust (NEST) has said.

Mark Fawcett noted that the six largest US banks had been fined around $100bn (€73.6bn) in recent years – including a $13bn settlement between JP Morgan and the US Justice Department over the investment bank’s involvement in the subprime mortgage crisis – and that the sums were largely down to failures of governance.

Speaking at the National Association of Pension Funds stewardship conference earlier this week, Fawcett added that this was essentially $100bn in funds taken away from investors, including pension funds, and that, as defined contribution funds such as NEST were now the “genuine” long-term investors in a world of declining defined benefit funds, it was important to take the role seriously.

“I’ll argue, given those sorts of numbers, that, to date, institutional investors, asset owners, fund managers – despite the best efforts of most people in this room – have failed to focus on stewardship and governance,” he said.

“This is not just a ‘nice to have’ thinking about using our stewardship role appropriately, it’s a must. And it’s not just for the long term, it’s to protect members’ money now.”

Fawcett singled out JP Morgan joint chairman and chief executive Jamie Dimon for criticism, noting that he held both roles “against all best governance practices” and in spite of opposition from shareholders – although he noted that the percentage voicing concern had declined at the most recent annual general meeting over the previous year’s share of around 40%.

He said this demonstrated how important collaboration was to persuading large companies to change their ways.

Awards 2013 risk mgmnt NEST & Deutsche AWM

Mark Fawcett (right) collects NEST’s IPE Award for best risk management at the ceremony in Noordwijk on 21 November.

“Jamie Dimon kind of believes he can do what he wants, right?” he said.

“He shows little remorse for $13bn of fines that have been levied on them, and he’s perfectly happy to be joint chief executive and chairman.”

According to an analyst note by MSCI ESG Research, JP Morgan’s fine amounted to 78 days of revenue when basing revenue on a three-year average.

However, the company also found that financial institutions subject to extraordinary fines – where the one settlement was more than 30% larger than the cumulative fines of the preceding three years – the return on average equity (ROAE) fell 75% for the quarter in which the fine was levied, compared with ROAE from the same time last year.

The note, which based its analysis on data from the four years to October, contined: “While this result is expected when the fine was booked, we found ROAE remained depressed for up to five consecutive quarters following an ‘extraordinary fine’.”

It added that this contrasted with no depression at institutions that were not subject to extraordinary fines.

Matt Moscardi, senior analyst at MSCI and author of the note, told IPE there was “without a doubt” an impact on returns due to the fines.

However, he said that while the extraordinary fines often led to a “shoring up of governance” across the affected banks, it was change that took years to implement.

“But it’s not uniform that it’s necessarily the shareholder pressure,” he added.

“What we are finding more often than not is that, when banks are making money, the shareholders largely are hands-off about it, and the governance changes are mandated by the regulatory aspects of the fine.”

Moscardi noted that similar challenges were not often found elsewhere – such as in the more strictly regulated utilities sector – and that the size of fines levied at the banks were the result of more than a decade of de-regulation of the industry.

“These fines are in lieu of regulation,” he said. “The new regulations are largely being lobbied away in the US […] and we haven’t noticed any change in controversial behaviour, for the most part.”