BNY Mellon’s record €10.8 million fine yesterday should send a message: regulators are cracking down on outsourcing practices by IFSC firms.
The central bank has fined companies heavily in the past – most notably the banks for their tracker mortgage shenanigans – but the international funds sector here has never before seen a fine in the tens of millions.
There are two main reasons for the high penalty.
First is the sheer size of BNY Mellon. It is the second largest fund manager in Ireland with over €1.1 trillion in assets under management. The central bank will usually adjust the penalties based on the size of the company, as this will have the appropriate effect.
But JP Morgan is a fairly large company and only had to pay €1.6 million when it broke outsourcing rules in 2019. Why is BNY Mellon different?
What regulators call “aggravating factors.”
That’s the second reason. BNY Mellon didn’t just fail a compulsory drill. The central bank has been known to throw its weight in the balance when companies innocently fail to put an i or tick a t.
But that was different. According to a schedule released by the CBI, BNY Mellon took officials on a six-year wild goose chase involving serious, persistent and unremedied financial rule violations.
As of 2014, the CBI found that BNY Mellon had failed to update it on its outsourcing and service activities and was asked to review its controls, update its inventory, and fix the issues. The company confirmed this.
But over the next year, more violations were uncovered going back three years.
Then, in 2016, the central bank found failings in the oversight of the fund manager’s outsourcing partners, including poor accounting practices and asset miscalculations.
BNY Mellon claimed to have resolved the issues by mid-2017, but that turned out not to be the case. The company only complied with the request a year later.
Further problems emerged in 2019 when BNY Mellon delayed some of its reporting on its outsourcing activities.
The central bank called this behavior misleading and accused the company of minimizing the seriousness of the violations.
No client money was lost, but when fund managers and their service partners do not record accurate assets or post gains and losses correctly, there are risks that could potentially translate into losses.
That’s what’s really bothering regulators — that office issues could ultimately lead to real money being put on the line.
That was the tone behind the central bank’s rebuke of asset manager Sarasin last year, when it too was fined much less for failing to properly oversee an asset manager it hired to manage client funds.
This violation risks the total loss of the affected customer funds. At BNY Mellon’s scale, that’s a risk regulators don’t want to take.
https://www.independent.ie/business/irish/central-banks-message-is-that-responsibility-cant-be-outsourced-41484808.html The message from the central bank is that responsibility cannot be outsourced