BNY Mellon has been fined a record £126 million for “failing to implement adequate organisational arrangements for safeguarding client assets”.
The UK’s financial regulator fined the custodian bank for failing to comply with rules applying to safe custody assets and to client money.
The FCA published the rules in 2010 to protect client custody assets if a bank becomes insolvent and to ensure those assets can be returned to clients as quickly and easily as possible. They require adequate systems, controls and records and the segregation of client assets from those of the custodian so that client assets can be identified in the event of an insolvency.
The issues came to light in the second quarter of 2012 when the Financial Conduct Authority (FCA) visited BNY Mellon to review the custodian's application of the banking exemption under the client money rules and found issues relating to its compliance with the custody rules.
The FCA found that while BNY Mellon maintained (or booked) accurate records and accounts at a global level, this was not the case at the entity specific level. It’s global custody platforms, which did not record with which BNY Mellon entity clients had contracted, caused several of the firms’ failure to comply with the CASS rules.
“Had the firms complied with the FCA’s custody rules, they would, in the event of the insolvency of their UK companies, have been able to provide entity-specific accounts and records to the insolvency practitioner. This would have reduced the risk identified including the loss in opportunity to deal with assets and the delay in the return of assets. There practitioner has to identify and go through a process to independently verify for which clients the insolvent entity holds assets and to settle unresolved shortfalls, which process causes a delay in the return of assets.”
The FCA also found that the custodian failed to conduct external reconciliations between its records and accounts and those of affiliate group companies, which the firms’ appointed as sub-custodians. Another finding was that it comingled the firms’ and clients’ custody assets, failing to take necessary steps to ensure assets from 13 accounts identified as the firms proprietary assets on its own records and accounts, which were deposited into client omnibus accounts with certain third parties were identifying separately to assets belonging to clients in those third party accounts.
Georgina Philippou, acting director of enforcement and market oversight at the FCA said: “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 subsequently conducted a review of its businesses. “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,” said its statement.
It added that it remained financially robust throughout the relevant period and, as indicated by the FCA, no clients suffered any loss as a result of the issues identified.
First published on www.globalcustodian.com.