Big four firm KPMG has been hit with a £3.5m fine by the Financial Reporting Council (FRC), while one of its directors, Richard Hinton, was handed a £52,000 penalty over their client assets report for The Bank of New York (BNY) Mellon London branch and BNY Mellon in 2011.

The two fines received a 30 per cent admissions discount and would have been £5m for KPMG and £75,000 for Hinton. The KPMG director has also previously admitted misconduct.

The regulator also delivered a severe reprimand and a requirement for a quality performance review affecting all those who sign a clients asset report on behalf of KPMG.

In 2011, the BNY Mellon entities had custody of client assets valued at their peak at over a trillion pounds sterling. While 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 tribunal found: “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.”

The tribunal said the substance of KPMG’s misconduct “lies in its failures to ensure appropriate training, support and supervision for the 2011 CASS audits of the banks”, noting it 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,” it said.

However, it highlighted that the size of the fine should not be such as to deter accountants from accepting audit or CASS audit engagements.

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