The U.K.’s Financial Conduct Authority this week fined two Bank of New York Mellon firms a total of £126 million ($185 million) for failing to comply with the FCA’s Custody Rules.
The FCA’s Client Assets Sourcebook (Custody Rules) protects safe custody assets if a firm becomes insolvent and ensures those assets can be returned to clients as quickly and efficiently as possible. The Custody Rules require regulated firms to keep entity-specific records and accounts, which insolvency practitioners use in the event of insolvency to identify those clients whose assets are safeguarded and are due to be returned.
According to the FCA, Bank of New York Mellon’s London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL) engaged in a number of compliance failings, 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 specific governance arrangements under Custody Rules that were sufficient, given the nature of the firms’ business and their failure to identify and remedy the failings identified.
These compliance failings, which occurred between 2007 and 2013, “reflected a failure by the firms to consider properly the interests of their clients,” the FCA stated. “The FCA’s specialist client assets supervisors identified most of the failings as part of their regular review of such firms.”
BNYMLB and BNYMIL’s failure to comply with the Custody 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,” FCA stated.
BNYMLB and BNYMIL are the third and eighth largest custody banks in the U.K, respectively, and provide custody services jointly to 6,089 U.K.-based clients. During the period of their breaches, the safe custody asset balances held by BNYMLB and BNYMIL peaked at approximately £1.3 trillion ($1.9 trillion) and £236 billion ($348 billion) respectively. As a result, these firms are systemically important to the U.K. market.
“Had the firms become insolvent, the total value of safe custody assets at risk would have been significant,” FCA added. “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 imposed “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,” said Georgina Philippou, FCA’s acting director of enforcement and market oversight.
Because the firms agreed to settle at an early stage of the FCA’s investigation, they qualified for a 30% discount. “Were it not for this discount, the financial penalty would have been £180 million,” the FCA stated.
“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,” Philippou said.