Managing Mismanagement

Posted: 12th October 2015

Have you ever wondered what happens to your money after you hand it over to the cashier in your local bank or even your financial adviser? I know I do.

In recent months we have seen a number of fines for the mismanagement of client assets. Barclays were fined £38 million by the FCA for putting £16.5 billion of client assets at risk and, more recently, The Bank of New York Mellon London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL) were hit with a fine of £126 million for a similar failing.

BNYMLB and BNYMIL (together ‘the firms’) failed to arrange adequate protection for safe custody assets for which they were responsible during the period November 2007 to August 2013. They also breached a number of rules within the Client Assets Sourcebook (CASS). Failings within the firms can be categorised into 4 key areas:

Internal

The main failings internally for the firms consisted of inadequate training, none or very limited CASS-specific governance arrangements until 2011, records and accounts failings and finally a failure to identify key issues. Training and governance is key to ensuring the risk of loss to client’s assets is minimised.

Have your employees with operational or oversight responsibility for custody assets received appropriate CASS-specific training?

Are you confident that you remain up-to-date with industry issues and regulatory changes?

Client money

Failure to segregate use of clients’ assets without consent and funding external discrepancies were fundamental here. September 2008 saw the collapse of Lehman Brothers, which was the largest bankruptcy case in the US. Unfortunately some client money was not segregated in accordance with CASS rules, which later led to the development of a CF10a. Ideally, the firms should have actively reviewed their processes to learn lessons from this industry changing event.

Have you reviewed the frequency of reconciliations to ensure that they are as accurate as possible?

Client Money and Asset Return (CMAR)

Since 1 October 2011, SUP 16.14 requires a firm to submit a completed CMAR to the FCA within 15 days of the end of each month. The firms did not record the legal entity with which clients contracted or perform entity-specific reconciliations and, as a result, the CMAR was incomplete and inaccurate.

Is your CMAR complete, accurate and submitted monthly within 15 days of the end of each month?

CASS Resolution Pack

The firms failed to maintain an adequate CASS resolution pack from 1 October 2012 when the requirement came into force. CASS 10 requires a firm to maintain a CASS resolution pack to help speed up the return of client assets in the event of a firm’s failure thus reducing the impact of this failure on clients. This information must be retrievable within 48 hours.

Are you confident that you are able to effectively retrieve the necessary information in the event of insolvency within 48 hours?

So why was the penalty amount so substantial in relation to Barclays?

Throughout this six year period, the safe custody asset balances held by the firms peaked at approximately £1.3 trillion and £236 billion, highlighting their systemic importance to the UK market and the severity of the impact insolvency would have had on the UK market. 

If we look at this from a conduct perspective, the impact here is to retail customers like you and me. Many of us struggle to manage our own finances, so maybe it’s the same for firms, particularly given the size of the assets they control? Volumes, however, cannot counteract responsibility and we must be able to trust financial institutions to look after our money and ensure it remains safe and secure. As a result, firms need to ensure they are consistently putting the customer first and part of this may include reviewing the adequacy of its training and systems and controls in place.