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Central Bank

Irish arm of large US financial firm fined €10.78 million over 'serious systemic' breaches

BNY Mellon Fund Services also provided “inaccurate and misleading information” to the Central Bank.

LAST UPDATE | 24 Mar 2022

THE CENTRAL BANK of Ireland has reprimanded and fined an Irish arm of a major US financial services company close to €11 million over “serious systemic” breaches of its regulatory obligations.

Announced this morning, the €10,780,000 fine — the largest the regulator has ever handed out to a company of its type — is against a subsidiary of The Bank of New York Mellon Corporation.

The Irish company, BNY Mellon Fund Services Ireland DAC (BNY DAC), is the second-largest provider of fund administration services in Ireland, responsible for assets worth €1.13 trillion.

Its parent entity — which has offices in Dublin, Cork and Wexford — is one of the top three fund services providers in the world.

BNY DAC provides day-to-day ‘back office’ services such as accounting on behalf of its clients, which include Irish and global investment and pension funds.

The Central Bank’s fine and reprimand relate to the firm’s outsourcing of administrative services to other entities.

Fund services administrators often outsource some of their regulated activities to other companies to reduce costs and increase the scale of their operations.

However, that practice is subject to a range of regulatory obligations, enforced by the Central Bank of Ireland.

BNY Mellon Fund Services DAC has now admitted to 16 separate breaches of Irish regulations, which took place over six years between 2013 and 2019.

In a statement, the Central Bank said an investigation into the company “identified serious systemic breaches across BNY DAC’s” outsourcing framework.

Among other things, the company failed to notify the Central Bank in advance of outsourcing services and adopted unapproved outsourcing arrangements with other companies that were in operation for up to three years. 

“These failings undermined BNY DAC’s ability to effectively identify and manage the risks associated with its outsourcing arrangements; undermined the Central Bank’s ability to properly assess, monitor and supervise BNY DAC’s outsourcing of regulated activities; and created unnecessary potential risks to its clients, investors and the financial markets,” the Central Bank said.

BNY DAC committed “additional breaches”, the regulator said, by providing “inaccurate and misleading information” and by failing to report the breaches.

The Central Bank originally set the fine at €15.4 million. However, the final figure was reduced by 30% to almost €10.8 million because BNY DAC admitted to the breaches. 

The Central Bank’s Director of Enforcement and Anti-Money Laundering, Seana Cunningham, said that while outsourcing can be “beneficial” for fund administration providers,  firms are required to manage their own arrangements and risks correctly and in line with regulations.

“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,” Cunningham said.

“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, “This investigation also found that BNY DAC failed to act with expediency, transparency and openness even once it was aware that there were further issues with its outsourcing arrangements.

“The Central Bank expects firms to be candid in all of their dealings with the Central Bank. This is even more important when failures have occurred. Regulated firms must have a culture, driven by their boards, which supports transparency with the regulator. 

In a statement this afternoon, a spokesperson for BNY Mellon said, “BNY Mellon Fund Services (Ireland) DAC 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.

“We remain steadfastly focused on demonstrating fulfilment of our regulatory obligations and being a strong and trusted partner.”

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