Bank of New York Mellon has been fined £126 million by the City regulator for breaking rules designed to protect more than £1 trillion worth of assets held on behalf of UK-based clients in the event of a Lehman Brothers-style collapse.
The group was handed the penalty by the Financial Conduct Authority (FCA) over failings between November 2007 and August 2013.
It was found to have breached rules in relation to its role as a “custody bank”, with the “systemically important” role of keeping assets safe.
The watchdog said the seriousness was compounded by the fact that this took place at a time of “considerable stress in the market”.
Failings covered the Bank of New York Mellon London Branch and the Bank of New York Mellon International, which together provide custody services to 6,089 UK-based clients. During the period of the breaches, the two firms held safe custody asset balances peaking at £1.3 trillion and £236 billion respectively.
Georgina Philippou, the FCA’s acting director of enforcement and market oversight, said: “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.”
She added: “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.”
Rules for custody banks include keeping “entity specific” records and accounts so that in the event of an insolvency these could be used to identify safeguarded assets to be returned to clients. But the FCA found that instead, the firms used global platforms to manage clients’ safe custody assets “which did not record with which BNY Mellon Group entity clients had contracted”.
Breaches also included failing to take necessary steps to prevent these safe custody assets being mixed up with other accounts, and on occasion using them to settle other clients’ transactions without prior consent.
Following the collapse of Lehman Brothers in 2008, the regulator’s predecessor, the Financial Services Authority, had written to compliance officers and chief executives highlighting concerns about the management of client assets. Chiefs were asked to confirm their firms fully complied with the rules.
The FCA said the Bank of New York Mellon firms agreed to settle at an early stage of its investigation, meaning they qualified for a 30 per cent discount from the fine, which would otherwise have been £180m.
The final penalty is the eighth biggest to have been imposed by the regulator, and came the day after the FCA fined Clydesdale Bank £20.7m for “serious failings” in the way the Glasgow-based lender handled complaints over mis-sold payment protection insurance.