Yesterday’s UK Financial Conduct Authority fine of the The Bank of New York Mellon London Branch and The Bank of New York Mellon International Limited (BNYM) for £126 million for failure to comply with FCA custody related rules is a salutary lesson in the importance of both understanding where operational risks lie within the custody business and, for pension fund investors, understanding what their rights of redress might be under contract.
The reason BNYM was fined such a significant amount was that the FCA, noting BNYM’s systemically important position in the UK custody market, identified extensive breaches covering a period of almost 6 years which in turn evidenced serious governance failures. The details of the actual breaches are set out in a 33 page Final Notice, but in summary the list included:
- basic bank reconciliation errors between the correct BNYM entities and client accounts (although BNYM knew what it owed clients at a global platform level, it could not tell which entity or sub-custodian owed which obligations);
- the commingling of the bank’s own money with client accounts which should have been segregated under the relevant contracts;
- the unauthorised use of certain client monies to settle other clients’ transactions without the express prior consent of all clients involved; and
- failing to have appropriate governance and training systems in place to prevent these breaches.
As the FCA pointed out, “compliance with the custody rules prior to insolvency can have a mitigating effect in an insolvency process…and is something over which firms have complete control”.
There are important lessons here for pension fund trustees, even though these breaches derive from regulatory intervention rather than contractual claims. It is, as ever, important for trustees to know what a custodian bank can and cannot do with pension fund money and assets and to take advice to prevent the fund being put at risk.