Earlier this month, the FCA fined Bank of New York Mellon London and Bank of New York International £126 million for failing to arrange adequate protection for safe custody of assets for which they were responsible. The announcement outlines that the entities were unable to meet the requirement to:
- conduct entity-specific external reconciliations;
- prevent the commingling of safe custody assets with firm assets;
- implement client asset governance arrangements that were sufficient given the nature of the firms’ business.
The notice itself is interesting, and well worth a read if you are a user of custodian services. Three things we found particularly interesting were:
1) There are repeated criticisms that the global custody platform did not record the entity that the client had contracted with. This meant that reconciliations were performed at a global (group-wide) basis rather than specific to the entity providing the service. There are similar observations relating to the structure of contracting services within the group.
2) The FCA Notice even quotes a regulatory review as saying that the global operating model ''creates a level of complexity for the Firms in execution of their respective CASS obligations”. The FCA Notice makes a point that the internal audit or compliance monitoring had generally not identified these issues. This is surprising (given the FCA Notice highlights a non-compliant period of nearly 6 years).
3) There are several suggestions that regulation in this area was not considered a high priority. For example, the FCA Notice outlines that, until June 2011 there were no committees that dealt specifically with CASS and roles and responsibilities remained uncertain through the period to August 2013. The Notice also outlines that compliance ''did not perform a sufficiently proactive CASS role''.
The question we’re most often asked by clients that engage custody services is how they know the assets actually exist. While it’s good to see regulatory focus in this area, the detail of the FCA notice will do little to maintain trust in the answer that custodians give to that question.
Please contact us to discuss.