UK watchdog fines Merrill Lynch

The Financial Conduct Authority has slapped the Bank of America's Merrill Lynch with £35 million fine.

FCA has accused of Merrill Lynch International of having failed to report 68.5 million derivative trades in the two years to February 2016.

Background

Merrill Lynch Wealth Management is a wealth management division of Bank of America. Founded in 1914, the firm is headquartered in New York City.  Merrill Lynch employs over 15,000 financial advisors and manages $2.2 trillion in client assets. It was founded on January 6, 1914 by Charles E. Merrill.

The current iteration of the first came into existence in 2009. Prior to that it was publicly owned. However, it couldn’t ensure its own survival due to the 2008 Financial Crisis. The firm was acquired by Bank of America on September 14^th, 2008. In 2012, its revenue was US$13.8 billion.

The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom. It is an independent authority that is not directly monitored by the UK government. Its primary goal is to monitor financial firms providing services to consumers. It is also tasked with maintaining the integrity of the UK’s financial markets. Currently the body is financed by charging fees to members of the financial services industry.  

2008 Financial Crisis

The global financial crisis that stemmed from the subprime mortgage crisis in the US in 2017, is generally considered as one of the worst financial crisis to hit since the Great Depression in 1930s. It ultimately led to the collapse of the Lehman Brothers in 2008 and the banking industry only survived due to government bailouts that were arranged. However, that crisis quickly led to the European debt crisis which crippled the European economy as well. After the crisis, FCA introduced a host of new rules in order to regulate companies and firms. They were introduced to ensure that firms do not take advantage of loopholes to cause another recession.

Analysis

FCA has accused Merrill Lynch of failing to report nearly 69 million transactions over two years. To that effect, the regulator fined the firm £35 million for violation of rules. The fine was reduced by 30% because the bank agreed to settle early on and did not contest FCA’s ruling. FCA has pointed out that the Merrill Lynch failed "to allocate adequate and sufficient human resource to undertake its obligations to report trading in exchange traded derivatives" under the Emir rules. This is the first time these rules have been enforced after they were introduced post the 2008 Financial Crisis.  

Mark Steward, the FCA's executive director of enforcement and market oversight said, “There needs to be a line in the sand. We will continue to take appropriate action against any firm that fails to meet requirements." Stewart also noted that the regulator will continue to ensure such firms do not violate rules in the future as well in order to protect the integrity of the market. He added, “Effective market oversight depends on accurate and timely reporting of transactions. There needs to be a line in the sand. We will continue to take appropriate action against any firm that fails to meet requirements," he said.

Bank of America Merrill Lynch for its part has maintained that it has been transparent in its dealings. It said that it had informed the FCA of the breach. A statement from the firm noted, “We are wholly committed to complying with all applicable regulatory requirements. When we discovered that certain trades had not been fully reported to a trade repository, as required following the introduction of EMIR (European Markets Infrastructure Regulation), we immediately reported the matter to the FCA.” The firm further elaborated, “We have re-evaluated and improved our related processes and can confirm that no clients were financially impacted as a result."

Assessment

Our assessment is that financial regulators have become more vigilant in the wake of the Financial Crisis of 2008. FCA has signaled that it will be ensuring that any organization in violation of its rules will be immediately policed and subjected to a fine.