FCA fines BNY Mellon for breach of custody rules

FCA fines BNY Mellon for breach of custody rules

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The UK Financial Conduct Authority (FCA) has issued a £125m ($188m) fine to BNY Mellon's London branch (BNYMLB) and the Bank of New York International (BNYMIL) for failing to comply with the watchdog's custody rules (CASS) between November 1 2007 and August 12 2013.

The FCA's rules require firms to keep entity-specific records and accounts in order to more easily identify client assets in case of insolvency. BNYMLB and BNYMIL used global platforms to manage clients' assets, which did not record with the entity that clients had contracted with.

The firms agreed to settle at an early stage of the FCA investigation and qualified for a 30% discount which reduced the original penalty of £180m.

“Our custody rules are in place to ensure that clients are protected in the event of insolvency," said Georgina Philippou, acting director of enforcement and market oversight at the FCA. 

"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."

The FCA said that BNYMLB and BNYMIL would be unable to conduct entity-specific external reconciliations, maintain an adequate CASS resolution pack (required from October 2012) or submit accurate client money and asset returns, as a result of the breach.

"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 Philippou.

The FCA said that BNYMLB and BNYMIL are systemically important because they represent the third and eighth largest custody banks in the UK, respectively, and provide custody services to 6,089 UK-based clients.

In a statement BNY Mellon said that the fine amount is fully covered by pre-existing legal reserves and that BNY Mellon remained financially robust throughout the relevant period. It also stressed that no clients suffered any loss as a result of the issues identified.

“BNY Mellon 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," it stated.

“BNY Mellon is very mindful of the importance of safeguarding client assets and has been trusted by its clients to do so for 230 years,

"We regret in this case that we did not meet our standards or those of the FCA. As always, regulatory compliance remains a key area of focus as we maintain our track record of safety and soundness as a financial institution.”

The FCA warned other firms with responsibility for client assets that they 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,” added Philippou.

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