The Financial Conduct Authority (FCA) has fined the Bank of New York (BNY) Mellon £126m for failure to comply with its custody rules.
The FCA said between 1 November 2007 and 12 August 2013 both the London and international branches of the custodian bank had failed to comply with rules which require firms to keep entity-specific records and accounts which protect clients in the event of insolvency.
It said both BNY Mellon London Branch (BNYMLB) and BNY Mellon International (BNYMIL) used global platforms to manage clients’ safe custody assets which did not record with what BNY Mellon Group entity clients had contracted.
The FCA said its custody rules are there to protect safe custody assets if a firm becomes solvent and to ensure those assets can be returned to clients as quickly and easily as possible. Each regulated firm is required to ensure they have adequate systems, controls and records to facilitate this.
FCA acting director of enforcement and market oversight Georgina Philippou said: “The firms’ failure to comply with our rules including their failure to adequately record, reconcile and protect safe custody assets was particularly serious given the systemically important nature of the firms and the fact that safeguarding assets is core to their business. Had the firms become insolvent, the total value of safe custody assets at risk would have been significant. This is compounded by the fact that the breaches took place at a time when there was considerable stress in the market.
“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. 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.”
The specific obligations the firms were unable to meet include: ability to conduct entity-specific external reconciliations; maintain an adequate CASS resolution pack (from 1 October 2012 when the requirement to do so came into force); and submit accurate Client Money and Asset Returns (CMAR) (from October 2011 when the requirement to do so came into force).
In a statement BNY Mellon said it has worked cooperatively with the FCA to address issues related to its CASS compliance and as part of its resolution with the watchdog had agreed to pay a penalty of £126m, including a discount which the FCA applied in recognition of the company’s cooperative efforts to resolve the matter at an early stage.
It added: “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.
“Consistent with our commitment to being a strong and trusted partner to our clients, BNY Mellon launched a broad internal review with the assistance of an independent, third-party accounting firm and external legal advisers immediately upon learning of these issues. As a result, we have engaged in a remediation process and have taken clear steps to put in place a framework of new and improved policies and operational procedures as well as enhance our specialist resources across many functions to reinforce our compliance with CASS rules.”
According to the FCA, the BNY Mellon Group is the world’s largest global custody bank by safe custody assets. BNYMLB and BNYMIL are the third and eighth largest custody banks in the UK respectively and provide custody services jointly to 6,089 UK-based clients.
During the period of their breaches, the safe custody asset balances held by BNYMLB and BNYMIL peaked at approximately £1.3trn and £236bn respectively. The FCA said therefore, the firms are “systemically important” to the UK market.
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