KPMG faces FRC Mellon probe

Auditors from KPMG are to be investigated by the Financial Reporting Council for their conduct in relation to customer deposits at the London branch of Bank of New York Mellon.

The accountancy regulator said its action followed a disciplinary action by the Financial Conduct Authority (FCA) that resulted in a £126m fine for the bank in April for failing to comply with FCA safe custody rules for client assets (CASS).

During the period of the breaches (2007-13), two branches of the BNY Mellon Group served more than 6,00 UK clients whose assets peaked at more £1.5 trillion.

The period under scrutiny covered the global financial meltdown in which the collapse of Lehman Brothers focused attention on practices at the failed bank’s London branch. In response, UK regulators looked more closely at how other banks were complying with safe-keeping rules.

Commenting on the BNY Mellon case, the FCA noted: “Failure to comply with our rules including their failure to adequately record, reconcile and protect safe custody assets was particularly serious given the systemically important nature of the firms and the fact that safeguarding assets is core to their business.”

Shortcomings identified by the FCA at Mellon’s UK branches included:

• “commingling” safe custody assets with firm assets from 13 proprietary accounts;
• using safe custody assets held in omnibus accounts to settle other clients’ transactions without their express prior consent; and
• failing to implement CASS governance arrangements and failure to identify and remedy those failings.

Since poor record-keeping and governance procedures are the sorts of things that auditors are hired to spot, the FRC’s interest in the case is understandable.

For its part, KPMG has been issuing statements reaffirming its commitment to high professional standards and undertaking to co-operate with the FRC investigation.