The message from the Central Bank is that responsibility cannot be outsourced
The record fine of 10.8 million euros imposed on BNY Mellon yesterday was supposed to send a message that regulators are cracking down hard on the outsourcing practices of IFSC firms.
he Central Bank has slapped stiff penalties on companies before – notably banks for their follow-up mortgage shenanigans – but the international funds industry here has never seen a penalty hit the double-digit millions before.
There are two main reasons behind the big fine.
First, the size of BNY Mellon. It is the second largest fund administrator in Ireland with over €1.1 billion in assets under management. The Central Bank usually scales the penalties according to the size of the company, as this has an appropriate impact.
But JP Morgan is quite a large entity and it only had to pay 1.6 million euros when it broke outsourcing rules in 2019. Why is BNY Mellon different?
What regulators call “aggravating factors”.
This is the second reason. BNY Mellon didn’t just fail a ticking exercise. The Central Bank is notorious for throwing its weight behind when companies harmlessly omit to dot an i or cross out a t.
But it was something else. According to a timeline released by the CBI, BNY Mellon has engaged officials in a six-year lawsuit over serious, prolonged and uncorrected violations of financial rules.
Beginning in 2014, the CBI found that BNY Mellon failed to inform it of its outsourcing and maintenance activities and needed to review its controls, update its inventory, and fix the issues. The firm has confirmed that yes.
Yet the following year, more violations were uncovered, dating back three years.
Then, in 2016, the Central Bank identified failings in oversight of the fund administrator’s outsourcing partners, including poor accounting practices and miscalculations of asset values.
BNY Mellon said it fixed the issues in mid-2017, but that turned out not to be the case. It wasn’t until a year later that the company complied.
Further issues arose in 2019 when BNY Mellon delayed some of its reporting on its outsourcing business.
The Central Bank called the behavior misleading and accused the company of trying to downplay the seriousness of the breaches.
No client money has been lost, but when fund administrators and their service partners fail to record appropriate asset values or properly account for gains and losses, risks arise that could potentially turn in losses.
This is what really exercises regulators – that administrative issues could ultimately put real money at risk.
That was the tone behind the Central Bank’s rebuke of wealth manager Sarasin last year when she was also fined a much smaller amount for failing to properly supervise an investment manager she hired. to manage client funds.
This breach, he said, risked losing all of the affected customer’s money. On a BNY Mellon scale, that’s a risk the regulator doesn’t want to take.