KPMG slammed with £3.5m fine for BNY Mellon reporting failures

The Financial Reporting Council (FRC) has given Big Four auditor, KPMG a multimillion pound fine for misconduct over client asset reporting at BNY Mellon banking group dating back eight years

A KPMG partner, Richard Hinton, who was a director at KPMG at the time and was assigned responsibility for signing off the client asset report, has been fined £75,000 and reprimanded for misconduct relating to client assets reports for BNY Mellon banking group. The firm has been severely reprimanded and faces a £3.5m fine, reduced from £5m, the standard FRC discount.

The fines relate to misconduct in reporting and monitoring client assets reports for their client, Bank of New York Mellon in London and the Bank of New York Mellon (International) Ltd (BNY Mellon entities) for 2011.

The incident involved the London and New York branches of BNY Mellon and related to misconduct which happened in 2012. The initial investigation was launched in 2015 and last autumn the firm admitted misconduct. The subsequent hearing to determine the level of penalties only concluded in May 2019.

BNY Mellon Group is the world’s largest global custody bank by the value of client assets that it holds, based principally in New York, with a London branch and is incorporated in Delaware in the US. Not only was KPMG responsible for Client Asset Sourcebook (CASS) audits but it was also the audit firm responsible for statutory audits for the group.

KPMG Audit plc has been fined £5m for admissions of misconduct, reduced by 30% to £3.5m and severely reprimanded, while partner Richard Hinton has been given a £75,000 fine (reduced to £52,500), although he was only a director at the time of the incident.

Richard Hinton, who was a KPMG director at the time, signed the 2011 Client Assets Reports with custodial assets valued at over £1 trillion at the time in the UK.

Although the misconduct happened nine years ago, the FRC is imposing tough sanctions on KPMG to ensure that this practice is not endemic at the firm, with a three-year monitoring scheme.

In addition to the monetary fines, the regulator will monitor KPMG on the quality of its client asset reporting procedures for the next three years to avert any repetition of the slack oversight.

The FRC has imposed a requirement for the firm to institute a quality performance review process affecting each person who signs a client assets report on behalf of KPMG, and a requirement to provide written reports to the FRC on the details, conclusions and actions arising from the reviews. The review process is to last three years.  Each person who signs a client assets report during that period shall be subject to at least one quality performance review in respect of their Client Asset Sourcebook (CASS) audits.

In 2011, the BNY Mellon entities had custody of client assets valued at their peak at over a trillion pounds sterling. Whilst it was not suggested to the Tribunal that the risk of insolvency was significant the Tribunal noted that the global BNY Mellon group was ‘of systemic importance in the global financial system, and insolvency could potentially have catastrophic consequences’. 

The BNY Mellon entities were required to comply with the Client Asset Sourcebook (CASS) published by the then Financial Services Authority (FSA). KPMG, as the BNY Mellon entities’ auditor, was instructed to prepare and submit reports to the FSA concerning compliance with CASS.

No BNY Mellon clients suffered any loss as a result of the issues identified. However, the records, accounts and reconciliations did not comply with aspects of the requirements of CASS.

The Tribunal found that ‘the misconduct consisted of a failure to understand and to apply fundamental rules of CASS, requiring the banks to keep their own records and carry out their asset reconciliations on their own legal entity basis.  No dishonesty or recklessness was involved but the Misconduct involved the misapplication of rules that…are of very great importance to the financial system.’ (para 81).

At para 88 of the report, the Tribunal set out the approach to the sanction imposed on KPMG: ‘The substance of KPMG’s misconduct lies in its failure to ensure appropriate training, support and supervision for the 2011 CASS audits of the Banks, in a context that could scarcely be more important. 

‘The size of the fine must demonstrate to the respondents, the profession and the public the very great importance of ensuring that these regulatory rules are correctly applied and complied with.  It must act as a deterrent against failures to comply with regulatory requirements. 

‘The appropriate fine must take into account KPMG’s poor disciplinary record in relation to audits, but also the steps it has taken to prevent a recurrence and its part in promoting effective CASS audits since 2012.  We also take into account that a fine should not be such as to deter accountants from accepting audit or CASS audit engagements.’

The sanctions against Hinton reflected KPMG’s admission of its failure to provide appropriate training and support; that he was not a partner at the time of the misconduct; and that he is not presently working as a CASS auditor.

A KPMG spokesperson said: ‘This announcement relates to Client Assets Reports issued by our firm in relation to The Bank of New York Mellon (International) Limited and The Bank of New York Mellon London Branch’s compliance with the FCA’s Client Assets Sourcebook (CASS) for the year ended 31 December 2011.

‘It is important to note that no client of either The Bank of New York Mellon (International) Limited or The Bank of New York Mellon London Branch suffered actual financial or other loss and this case does not relate to client money. Our separate audit opinions on the financial statements have not been called into question.

‘We regret that aspects of our work did not meet the standards expected by our regulator. CASS regulation has evolved significantly since this case and we have fundamentally enhanced the procedures governing our work.

‘We are pleased that in its verdict, the Tribunal noted the steps we have taken to prevent a recurrence and our part in promoting effective CASS audits since 2012 and the additional mandatory training we have implemented to enable us to deliver the best quality work.

‘We are happy to undertake the additional review process outlined by the FRC as part of our drive to improve audit quality.

‘We have cooperated with the FRC over the last four years to bring this investigation to a close and we are committed to bringing these historical cases to a swift conclusion.’

The Tribunal made orders awarding costs against KPMG in respect of Executive Counsel’s costs and the Tribunal’s costs.

FRC disciplinary BNY Mellon KPMG judgment issued 1 Aug 2019

Sara White | 01-08-19

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