In April 2015, two UK subsidiaries of the Bank of New York/Mellon (BNY Mellon) were fined some £126 million for failing to “consider properly the interests of their clients”. BNY Mellon is the largest custodian bank in the world and one of the world’s Systemically Important Banks (SIB).
But has BNY Mellon become Too Big to Care?
Custodian to the World
BNY Mellon is the world’s largest ‘Custodian’ bank with ‘assets under custody and management’ of some $28.5 trillion, some 30% more than the next largest bank – JPMorgan. It employ some 50,000 people in 35 countries and has a proud record of providing banking services for over 230 years. BNY Mellon breezed through the Global Financial Crisis (GFC), mainly because it does not give out the crazy loans that other banks do.
Its main business is being an old fashioned bank. You go to BNY Mellon with your valuables, not your aunt’s jewellery but stocks and bonds and other financial assets. And they will keep them safe for you, doing all the boring stuff like collecting dividends and interest payments. It is the bank of the ‘coupon clippers’, the bank of ‘old money’. It is also the bank that investment and pension fund managers most rely on to keep secure your pension assets, and that is what has led to the bank’s pre-eminence in this old-fashioned area of global banking.
Everyone trusts BNY Mellon.
But BNY Mellon is no quill-pen and passbook operation. It is a highly sophisticated, automated operation, with money flowing 24 hours per day around the world. Its key role in the global banking system has made regulators designate it as a Systemically Important Bank (SIB), albeit that it just squeaks into the list.
But with so much money flowing around, some of it is bound to fall between the cracks – isn’t it?
FCA Fine
In April 2015 the UK banking regulator, the Financial Conduct Authority (FCA), fined two UK subsidiaries of BNY Mellon some £126 ($190) million for failing to “consider properly the interests of their clients”. [1]. The UK firms were custodians of over £1.5 trillion in assets between them, a very tidy sum.
In levying the fine, the FCA identified a catalogue of failures of the sort you might expect in such an operation, such as failing to: maintain comprehensive records; segregate assets properly; and reconcile records against holdings. This is not, as it might appear at first glance, a nit-picking objection about good record keeping. Imagine if you turned up at your bank and they refused to give you your money because their computer hard drive had crashed and although they had lots of cash they didn’t know how much belonged to whom. Sorry, we will get back to you!
Such a situation is not that farfetched. This is precisely what happened after Lehman’s bankruptcy and cases are still being fought through the courts. You may think that you personally are not involved, but if you are in a large pension fund or investment firm, BNY Mellon will, at some stage, almost certainly have processed your savings.
Too Big to Care
Everyone makes mistakes, it’s human. In a huge organisation like BNY Mellon, hundreds of mistakes will be made each day – that is a reality of business. But it’s not what happens when a mistake is made, it’s what happens to ensure that it will not occur again, that is important. If firms do not acknowledge even the possibility of errors or sweep them under the carpet, then not only will the same mistakes happen again and again but a culture will develop where mistakes get accepted, and become ‘business as usual’.
The most depressing aspect of the BNY Mellon fine is not that errors occurred but the fact that the failings occurred over a period of over five years and the FCA notes that only one of the serious failings were found by “their own compliance monitoring or internal audit function” but by external parties: the regulator and third party consultants, engaged at the behest of the FCA.
By not being aware of serious problems over a long time, BNY Mellon has obviously failed in its duty of care to its clients. It’s not as if BNY Mellon is a ‘universal bank’, with tentacles in very financial market, like JPMorgan. It is almost a ‘mono-line’ bank with one focus, care of clients’ assets.
Although the FCA concluded that “a number of the [UK] Firms’ failings were failings of the Firms as a whole”, it did not comment on deficiencies in the firms’ culture. But the culture was clearly deficient.
In this BNY Mellon is not unique. In a new book [2], several case studies of organization-wide biases, such as Groupthink, Inattentional Blindness (failure to spot the obvious), and Illusion of Control are described. Many of these biases appear to be more prevalent in larger firms, such as BNY Mellon, as it becomes too hard in a big organization to ‘swim against the tide’. It is apparent that some of these biases were at play in this case.
Some firms become too big to care about the little guy.
The FCA noted that, when the failures had been brought to their attention, BNY Mellon were very cooperative and suitably chastened. In their press release [3] on the fine the bank underscored its 230 years of trust and regretted “in this case that we did not meet our standards or those of the FCA”. The bank noted that it had put in place a “framework [not described] of new and improved policies and operational procedures” and had added new staff. But no senior executive or Board member has resigned, or openly apologized, as yet.
The fact that they may not have learned the lessons of these failing may have been betrayed by their final comments, “As always, regulatory compliance remains a key area of focus as we maintain our track record of safety and soundness as a financial institution”.
However these failings were not primarily an issue of regulatory non-compliance but were the result of the firm losing its compass as regards its primary objective – earning and keeping the trust of its clients.
People Risk Management
The risk that an employee or group make bad decisions is a People Risk as it can lead to significant losses even the bankruptcy of the firm. In this case a myriad of decisions NOT to proactively search out and correct errors that might affect their clients resulted in a significant fine and considerable reputation damage to BNY Mellon.
This blog is one of a planned series that will discuss facets of People Risk in general and Decision-Making in particular. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.
References
[1] See the Final Notice issued by the Financial Conduct Authority to BNY Mellon
http://www.fca.org.uk/news/fca-fines-the-bank-of-new-york-mellon-london-international-126-million
[2] See Blacker and McConnell, 2015, ‘People Risk Management’, Kogan Page, London http://www.koganpage.com/product/people-risk-management-9780749471354
[3] See BNY Mellon News on their website
https://www.bnymellon.com/us/en/newsroom/news/press-releases/bny-mellon-enters-into-settlement-agreement-with-the-uk-financial-conduct-authority.jsp
People Risk Management 