UK regulator slaps BNY Mellon with fine for failing in custodial duties

LONDON (ShareCast) - The UK financial regulator has slapped Bank of New York Mellon International with a significant fine for failures in safeguarding around £1.5trn of client assets in the UK. The Financial Conduct Authority (FCA) said BNY Mellon and its London branch had failed to comply with UK custody rules that look to ensure client assets are protected in the event of insolvency.

BNY Mellon's failure to adequately record, reconcile and protect safe custody assets was "particularly serious", said the watchdog, given the systemically important nature of the bank "and the fact that safeguarding assets is core to [its] business".

BNY Mellon is a custodian bank, meaning financial institutions use it as a final custodian of their and their clients' physical underlying securities. The BNY Mellon Group and Bank of New York Mellon International are the third and eighth largest custody banks in the UK respectively and provide custody services jointly to 6,089 UK-based clients.

"Had [BNY Mellon] become insolvent, the total value of safe custody assets at risk would have been significant," said the FCA's enforcement and market oversight chief, Georgina Philippou. "This is compounded by the fact that the breaches took place at a time when there was considerable stress in the market." During the period of their breaches, between 1 November 2007 and 12 August 2013, the safe custody asset balances held by the London branch and the wider BNYM International group peaked at approximately £1.3tn and £236bn respectively, a reflection of the firms' systemic importance to the UK market.

The FCA's custody rules are meant to ensure clients are protected in the event of insolvency.

The regulator said the size of the fine reflected the value of safe custody assets held by the bank as well as "the seriousness of the failings" and the fact that these problems were not identified by internal compliance monitoring.

"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.