The Financial Conduct Authority (FCA) has fined The Bank of New York Mellon (BNY Mellon) £126 million, for failing to comply with rules on safeguarding custody assets and client money.
The fine is the largest of its kind to be issued by the regulator and addresses problems identified in both BNY Mellon London and BNY Mellon International between 1 November 2007 and 12 August 2013.
The firms were found to have failed to fulfil aspects of the FCA Client Assets Sourcebook (Custody Rules or CASS), which is designed to protect safe custody assets if a firm becomes insolvent.
BNY Mellon Group is the world’s largest global custody bank by safe custody assets. During the period of their breaches, the safe custody asset balances held by BNY Mellon London branch and BNY Mellon International sat at around £1.3 trillion (€1.8 trillion) and £236 billion respectively.
Instead of following the Custody Rules requirement for firms to keep entity-specific records and accounts, the firms used global platforms to manage clients’ safe custody assets that did not record which BNY Mellon Group entity clients had contracted.
This also meant that the firms were unable to meet their other obligations under the Custody Rules. Other failings included using safe custody assets held in omnibus accounts to settle other clients’ transactions without the consent of all clients whose assets were held in those accounts.
Georgina Philippou, acting director of enforcement and market oversight at the FCA, says: “Our Custody Rules are in place to ensure that clients are protected in the event of insolvency. 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.”
She adds that the size of the fine reflects the seriousness of the failings, and warns other firms with responsibility for client assets to ensure their own processes comply with FCA rules.
The BNY Mellon firms agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% discount, without which the financial penalty would have reached £180 million.
Commenting on the fine, regulatory lawyer, Chris Finney, partner at law firm Cooley, says the FCA has been “extremely sensitive” about breaches of the Custody Rules. He adds: “the FCA’s CASS rules are still too often complex; difficult to interpret and apply; and expensive to honour.”
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