The UK’s Financial Conduct Authority (FCA) has fined BNY Mellon £126 million ($185 million) for failing to comply with its custody rules.
The bank’s London and international branches were both scolded by the regulator, which looked at its actions between November 2007 and August 2013.
“Had the firms become insolvent, the total value of safe custody assets at risk would have been significant.” —FCA“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,” said Georgina Philippou, acting director of enforcement and market oversight at the FCA.
Under UK financial regulation, firms must keep entity-specific records and accounts. The FCA deems these reports to be important in the event of a bankruptcy as they will be used by an insolvency practitioner to identify the client assets that are safeguarded and due to be returned.
“Instead, the firms used global platforms to manage clients’ safe custody assets, which did not record with which BNY Mellon Group entity clients had contracted,” the FCA report said. “This failing meant that the firms were unable to meet their other obligations under the custody rules.”
Essentially, in the event of clients requesting their assets back, it would not have been immediately obvious where to find them. However, the FCA noted that there had been no loss of assets, nor had the custody giant acted deliberately or recklessly in this regard.
However, at that time, the two branches’ assets under custody peaked at $1.5 trillion, the FCA said, which made them “systemically important”. Additionally, the FCA report said the breaches had occurred when client asset safety had been under intense scrutiny.
“Had the firms become insolvent, the total value of safe custody assets at risk would have been significant,” the FCA report said. “This is compounded by the fact that the breaches took place at a time when there was considerable stress in the market.”
The relatively high fine reflected the above two points.
In a statement, BNY Mellon said it had “worked cooperatively” with the FCA and as a result had received a 30% discount for early resolution of the matter.
The company said it also “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 UK Client Asset Sourcebook rules,” the statement said.
The bank said it had paid the fine out of funds specifically reserved for legal issues.