15 April 2015
The FCA has fined The Bank of New York Mellon London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL) £126 million for breaches of Principle 10 (Client assets) and for failure to comply with the FCA Client Assets Sourcebook (CASS). CASS governs the safe custody of assets and client money and is concerned in particular with the need to swiftly return client assets in the event of a firm becoming insolvent. The custody asset balances during the relevant period peaked at £1.3 trillion for BNYMLB and £236 billion for BNYMIL.
The FCA found that, between November 2007 and August 2013, the firms had failed to maintain adequate protection for the assets held in safe custody. The misconduct included amongst other failings:
- maintaining records and accounts on a global, rather than entity-specific level;
- failing to take steps to ensure safe custody assets were not comingled with firm assets from its proprietary accounts;
- using safe custody assets held in omnibus accounts to settle other clients trades without the permission of the relevant client; and
- failing to implement CASS-specific governance arrangements.
The FCA gave a number of reasons for why the failings of the firms were particularly serious. Plainly, one reason was because BNY Mellon Group, of which the two firms formed a part, is the world's largest global custody bank custody assets. Other aspects were however also notable in addition, for example, that almost all of the failings were drawn to the firms’ attention by the FCA working with a regulatory advisor and Skilled Persons rather than through the firms’ own internal monitoring function.
A link to the Final Notice can be found here.
It is perhaps a statement of intent by the FCA that the fine was as high as it was. As has become the norm, the firms settled early, resulting in a 30% discount on the fine (from £180 million). The period in question straddled the old and the new penalty regimes, and a component of the fines was attributable to each period. In assessing the appropriate level of penalty, it is interesting to note the FCA's comments on the real need for deterrence in this area. A fine of £126 million is hefty (only the FX/LIBOR and “London Whale” fines have been higher). It was also notably much higher than previous fines for breaches of CASS (such as the £38 million fine given to Barclays in 2014 and the £7.2 million fine to Aberdeen Asset Managers and Aberdeen Fund Management in 2013). Further, when it came to the element under the new penalty regime, the FCA assessed the seriousness as being level 4, where level 5 is the most serious.
The level of fine is all the more striking given that the FCA did not identify any specific consumer loss as a result of the failings identified. It was the potential for loss, had the individual firms become insolvent, that motivated the fine. The Final Notice reiterated that, given that the risk of insolvency is manifested on an entity by entity basis, firms must ensure that their systems and controls in respect of CASS are organised on an entity-specific basis.
The focus on the failings in respect of CASS-specific governance arrangements is also of interest. Firms should take note of the need to ensure that responsibilities in respect of compliance with CASS are specifically included in such things as governance structures (including, where appropriate, CASS-specific compliance committees), accountability matrices and even individual job descriptions setting out CASS roles and responsibilities. On this topic, it will be noted that the FCA has added responsibilities for compliance with the CASS handbook to its list of proposed Senior Management responsibilities (see elsewhere in this edition "Further steps towards the new senior management regime").
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