Sanctions against KPMG and a partner in relation to Client Assets Reports of BNY Mellon entities
01 August 2019
The Financial Reporting Council (FRC) today announces sanctions against KPMG Audit Plc and a partner Richard Hinton, in relation to their Client Assets Reports in respect of The Bank of New York Mellon London Branch and The Bank of New York Mellon (International) Ltd (“BNY Mellon entities”) for 2011.
The sanctions imposed by the Tribunal following a hearing on 21-23 May 2019 are:
1. A fine of £5m, discounted by 30% for admissions of Misconduct, to £3.5m;
2. A severe reprimand; and
3. A requirement for 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 Asset Report during that period shall be subject to at least one quality performance review in respect of their CASS audits.
1. A fine of £75,000, discounted by 30% for admissions of Misconduct, to £52,500;
2. A reprimand.
KPMG and Richard Hinton who, as a director, signed the 2011 Client Assets Reports on behalf of KPMG, had previously admitted Misconduct.
The Report of the Disciplinary Tribunal has been published here
. An appendix to the Tribunal decision can be viewed here
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 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.” (Report, 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 Mr Hinton reflected KPMG’s admission of its failure to provide for him appropriate training and support; that Mr Hinton was not a partner at the time of the Misconduct; and that Mr Hinton is not presently working as a CASS auditor.
The Tribunal also made orders awarding costs against KPMG in respect of Executive Counsel’s costs and the Tribunal’s costs.