16 April 2015
The Financial Conduct Authority (FCA) has fined The Bank of New York Mellon (BNY Mellon) £126 million for failing to safeguard client money and assets.
Both the London and International Limited firms have been fined for failing to comply with Custody Rules, which protect safe custody assets if a firm becomes insolvent and to ensure those assets can be returned to clients as quickly and easily as possible.
During the period of the breaches, the safe custody asset balances held by BNY Mellon’s London and International Limited firms peaked at approximately £1.3 trillion and £236 billion respectively, which the FCA states, makes the firms systemically important to the UK market.
According to the FCA, the Custody Rules require firms to keep entity-specific records and accounts. Entity-specific records and accounts are important in the event of an insolvency as they will be used by an Insolvency Practitioner to identify those clients whose assets are safeguarded and are 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.
This failing meant that the firms were unable to meet their other obligations under the Custody Rules such as the requirements 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).
The FCA also found a number of other failings by the Firms including: failing to take the necessary steps to prevent the commingling of safe custody assets with firm assets from 13 proprietary accounts; on occasion using safe custody assets held in omnibus accounts to settle other clients’ transactions without the express prior consent of all clients whose assets were held in those accounts; and failing to implement CASS-specific governance arrangements that were sufficient given the nature of the Firms’ business and their failure to identify and remedy the failings identified.
The failings at the firms occurred between 1 November 2007 and 12 August 2013.
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. 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.
‘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.’