BNY Mellon Fund Services fined nearly €11m by the Central Bank for regulatory breaches

The breaches include failings to implement adequate outsourcing governance for its fund

An aggravating factor was that BNY Mellon failed to remediate the breaches when contacted to do so by the Central Bank.

The Central Bank has fined BNY Mellon Fund Services almost €11m for 16 regulatory breaches, the largest monetary penalty imposed on a fund service provider in Ireland to date.

An aggravating factor that led to the €10.78m fine was that BNY Mellon failed to remediate these conduct breaches after they were contacted to do so by the Central Bank.

The breaches by BNY Mellon included failings to implement an adequate outsourcing governance framework for its fund activities. It also did not comply with its regulatory obligations in respect of outsourcing.

“The investigation into BNY DAC found systemic weakness across its entire outsourcing framework. Despite intervention by the Central Bank over a number of years, BNY DAC repeatedly failed to address these deficiencies,” said the Central Bank’s director of enforcement and anti-money laundering Seana Cunningham.

“If outsourcing is not effectively managed, it has the potential to cause investor detriment and threaten the operational resilience of regulated firms and the Irish financial system,” she added.

The failure to address the breaches led to further regulatory failings by BNY Mellon over the course of six years before the fine was ultimately issued. The timeline of the breaches spanned from July 2013 to December 2019.

By not implementing an effective outsourcing framework, BNY Mellon’s ability to identify and manage the risks associated with its outsourcing arrangements was undermined.

It also undermined the Central Bank’s ability to properly assess, monitor and supervise BNY Mellon’s outsourcing of regulated activities and created unnecessary potential risks to its clients, investors and the financial markets.

“In recent years, in recognition of the increasing reliance regulated firms have placed an outsourcing, the Central Bank has increased its focus on outsourcing, specifically the management by regulated firms of the risks associated with outsourcing, through targeted onsite inspections, wider thematic reviews and public engagement,” said Ms Cunningham.

The Central Bank determined the appropriate fine for BNY Mellon’s behaviour to be €15.4m. This was reduced by 30% to the official €10.78m fine in accordance with the settlement discount scheme provided for in the Central Bank.

BNY Mellon Fund Services Ireland DAC stated that the organisation “sincerely regrets failing 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 engagement.” 

“The firm has taken the necessary steps to rectify the deficiencies that gave rise to the breaches,” the statement continued.

The Bank of New York Mellon Corporation, one of the top three fund administrators globally, is the ultimate parent of BNY DAC. BNY DAC is the second-largest fund administrator in Ireland with just over €1.13tn in assets under administration.

The fine imposed by the Central Bank was issued under Section 33AQ of the Central Bank Act 1942. The maximum penalty under Section 33AQ is €10m or an amount equal to 10% of the annual turnover of a regulated financial service provider, whichever is the greater.

This is the Central Bank’s 147 settlement under is Administrative Sanctions Procedure, bringing the total fines imposed by the Central Bank to over €201.7m.