The central bank issues a record €10.8m fine to BNY Mellon for ‘outsourcing’ violations

The central bank has slapped US finance firm BNY Mellon Fund Services with a record €10.8 million fine for failing to address outsourcing risks.

It is the highest penalty ever for a fund servicer, and follows 16 breaches of central bank rules and repeated calls for the company to take action.

BNY Mellon is the second largest fund manager in Ireland with just over €1.13 trillion in assets under management and provides fund back office activities in Ireland and globally.

Its parent company is the Bank of New York Mellon, one of the top three fund managers in the world.

The investigation, which spanned six years, from July 2013 to December 2019, found “serious systemic breaches” in BNY’s outsourcing practices that create “unnecessary potential risks for its customers, investors and the financial markets,” the central bank said in a statement on Thursday.

BNY failed to “work openly and transparently with the central bank once breaches of its regulatory obligations were identified,” the statement said.

The central bank’s director of enforcement and anti-money laundering, Seana Cunningham, said there were flaws “throughout their outsourcing framework”.

“Despite years of central bank intervention, BNY DAC has repeatedly failed to address these deficiencies.

“The central bank expects companies to take the necessary actions to address the vulnerabilities communicated to them and will hold companies fully accountable if they fail to do so.

“The central bank expects companies to be open in all their dealings with the central bank. This is all the more important when errors have occurred. Regulated companies need to have a culture that is driven by their boards and supports transparency with the regulator.”

BNY’s original fine of €15.4 million was reduced by 30% under the Central Bank’s settlement rebate scheme.

“BNY Mellon Fund Services (Ireland) DAC sincerely regrets that it has failed to meet its regulatory requirements and the expectations of the Central Bank of Ireland in relation to the oversight of outsourced fund administration activities and related regulatory interventions,” the company said in a statement.

“The company has taken the necessary steps to address the deficiencies that led to the violations. We remain focused on demonstrating compliance with our regulatory obligations and being a strong and trusted partner.”

Mutual funds are increasingly outsourcing their back-office work to other providers, with the central bank previously raising concerns about board members’ awareness of the extent of the practice.

Regulated entities must obtain central bank approval for all outsourced activities and strictly monitor the outsourced activities.

“If not managed effectively, outsourcing can harm investors and threaten the operational resilience of regulated companies and the Irish financial system,” Ms Cunningham said today.

Just last year, the central bank fined Sarasin Funds Management €385,000 for failing to identify and stop a breach of fund merger rules by one of its appointed fund managers. The central bank issues a record €10.8m fine to BNY Mellon for ‘outsourcing’ violations

Fry Electronics Team

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