FCA hits BNY Mellon with £126m custody failing fine
16 April 2015 London
Image: Shutterstock
BNY Mellon London branch and BNY Mellon International has been fined £126 million by the UK’s Financial Conduct Authority (FCA) for failing to comply with its custody rules.
The banks failed to meet the requirements of the FCA Client Assets Sourcebook (CASS), which applies to safe custody assets and client money, and ensures that assets can be returned to clients quickly in the case of a fund becoming insolvent.
According to the FCA investigation, BNY Mellon did not adequately record, reconcile and protect custody assets. This failing was deemed particularly serious because of the systematically important nature of the firms, and the fact that safeguarding assets is considered a key part of their business.
The report concluded that if the firms did fail, then the value of assets at risk would have been significant. The fine also took the timing of the breaches in to account, as they occurred when the market was under stress.
Georgina Philippou, acting director of enforcement and market oversight at the FCA said: “The size of the fine today reflects the value of safe custody assets held by the firms, as well as the seriousness of the failings and the fact that these failings were not identified by the firms’ own compliance monitoring.”
She added: “Other firms with responsibility for client assets should take this as a further warning that there is no excuse for failing to safeguard client assets and to ensure their own processes comply with our rules.”
“Client assets protection continues to be a priority for the FCA and firms who hold client assets should review their processes in line with these findings to ensure full compliance with the custody rules.”
BNY Mellon is the world’s largest custody bank by safe custody assets. In the UK, BNY Mellon London and BNY Mellon International provide custody to 6,089 UK-based clients, combined.
During the time of the breaches, the balance of safe custody assets held at BNY Mellon International peaked at £136 billion, while those held by the London branch reached £1.3 trillion.
The FCA’s custody rules require firms to keep entity-specific records and accounts, which would be used by an insolvency practitioner to identify the clients whose assets are due to be returned.
BNY Mellon used global platforms to manage clients’ safe custody assets, meaning that they could not conduct entity-specific external reconciliations or submit accurate client money and asset returns.
Other failings included not taking the necessary steps to prevent combining assets with firm assets from 13 propriety accounts, and using assets held in omnibus accounts to settle other clients’ transactions without consent.
The firms also failed to implement specific governance arrangements that were sufficient to the nature of the business.
These failing add up to a general failure to properly consider the interests of the clients.
BNY Mellon agreed to settle at an early stage of the investigation, and therefore qualified for a 30 percent discount on the penalty. This meant that a £180 million fine was reduced to £126 million.
BNY Mellon said in a statement: “This amount is fully covered by pre-existing legal reserves. Importantly, BNY Mellon remained financially robust throughout the relevant period and, as indicated by the FCA in its Final Notice, no clients suffered any loss as a result of the issues identified.”
The bank has also launched an internal review with the assistance of an independent third-party accounting firm and external legal advisors. It will also implement a new framework of improved policies and procedures.
The statement said: “BNY Mellon is very mindful of the importance of safeguarding client assets and has been trusted by its clients to do so for 230 years. This trust could not have been earned without robust regulatory compliance in all of our operating jurisdictions, and we regret in this case that we did not meet our standards or those of the FCA.”
“As always, regulatory compliance remains a key area of focus as we maintain our track record of safety and soundness as a financial institution.”
The failings occurred between 1 November 2007 and 12 August 2013.
The banks failed to meet the requirements of the FCA Client Assets Sourcebook (CASS), which applies to safe custody assets and client money, and ensures that assets can be returned to clients quickly in the case of a fund becoming insolvent.
According to the FCA investigation, BNY Mellon did not adequately record, reconcile and protect custody assets. This failing was deemed particularly serious because of the systematically important nature of the firms, and the fact that safeguarding assets is considered a key part of their business.
The report concluded that if the firms did fail, then the value of assets at risk would have been significant. The fine also took the timing of the breaches in to account, as they occurred when the market was under stress.
Georgina Philippou, acting director of enforcement and market oversight at the FCA said: “The size of the fine today reflects the value of safe custody assets held by the firms, as well as the seriousness of the failings and the fact that these failings were not identified by the firms’ own compliance monitoring.”
She added: “Other firms with responsibility for client assets should take this as a further warning that there is no excuse for failing to safeguard client assets and to ensure their own processes comply with our rules.”
“Client assets protection continues to be a priority for the FCA and firms who hold client assets should review their processes in line with these findings to ensure full compliance with the custody rules.”
BNY Mellon is the world’s largest custody bank by safe custody assets. In the UK, BNY Mellon London and BNY Mellon International provide custody to 6,089 UK-based clients, combined.
During the time of the breaches, the balance of safe custody assets held at BNY Mellon International peaked at £136 billion, while those held by the London branch reached £1.3 trillion.
The FCA’s custody rules require firms to keep entity-specific records and accounts, which would be used by an insolvency practitioner to identify the clients whose assets are due to be returned.
BNY Mellon used global platforms to manage clients’ safe custody assets, meaning that they could not conduct entity-specific external reconciliations or submit accurate client money and asset returns.
Other failings included not taking the necessary steps to prevent combining assets with firm assets from 13 propriety accounts, and using assets held in omnibus accounts to settle other clients’ transactions without consent.
The firms also failed to implement specific governance arrangements that were sufficient to the nature of the business.
These failing add up to a general failure to properly consider the interests of the clients.
BNY Mellon agreed to settle at an early stage of the investigation, and therefore qualified for a 30 percent discount on the penalty. This meant that a £180 million fine was reduced to £126 million.
BNY Mellon said in a statement: “This amount is fully covered by pre-existing legal reserves. Importantly, BNY Mellon remained financially robust throughout the relevant period and, as indicated by the FCA in its Final Notice, no clients suffered any loss as a result of the issues identified.”
The bank has also launched an internal review with the assistance of an independent third-party accounting firm and external legal advisors. It will also implement a new framework of improved policies and procedures.
The statement said: “BNY Mellon is very mindful of the importance of safeguarding client assets and has been trusted by its clients to do so for 230 years. This trust could not have been earned without robust regulatory compliance in all of our operating jurisdictions, and we regret in this case that we did not meet our standards or those of the FCA.”
“As always, regulatory compliance remains a key area of focus as we maintain our track record of safety and soundness as a financial institution.”
The failings occurred between 1 November 2007 and 12 August 2013.
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