The role of custodians has come to the fore in recent times following a number of high-profile collapses in the financial services industry, including Trio Capital. Specifically, there have been concerns regarding the safety of investment assets that custodians hold; the duty of care custodians exercise; and whether custodians have appropriate internal controls to ensure the safety of assets held for others.
At the end of 2011, approximately $1.8 trillion of assets of Australian investors was held in custody. This is expected to more than triple over the next 15 years to $6.4 trillion.
Given the role of custodians as key service providers within the financial services industry, areas that a custodian may need to consider include:
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unauthorised debiting of omnibus accounts
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stability and safety of IT systems
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operational risks created by manual and disparate systems
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whistleblowing culture and framework
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reporting in relation to suspicious third party valuations
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breach reporting relating to custodial and investment administration services, and
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the risks inherent in corporate actions such as share buy-backs and rights issues
For each aforementioned issue, ASIC has highlighted key aspects of ‘good practice’ - in line with its current regulatory guidance.
‘Custodians are important gatekeepers in that they have access to information, including real-time data on the flow of money through investment products, unavailable to ordinary investors,’ ASIC Commissioner Greg Tanzer said.
‘However, there are concerns about an expectation gap between what is legally required of custodians and what investors expect the custodian to be doing to safeguard their investment.
‘In order to promote confident and informed investors, and fair and efficient financial markets, we are also considering the need for clear disclosure about the role and description of custodians given that the term may create misconception among retail investors about the role of custodians.’
Report 291 Custodial and Depository services in Australia (REP 291) also foreshadows ASIC’s intention to consult with industry about updating its regulatory guidance for the holding of scheme property. In addition, we are proposing:
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changes to the financial resource requirements of custodians, and
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to require responsible entities and other financial product issuers to provide clearer disclosure about the role of custodians in retail marketing material, including product disclosure statements (PDS).
Background
A custodian or depository is generally a person who is responsible for safekeeping the assets of a third party client (e.g. a managed investment scheme). The custodian holds legal title to the assets of the client (e.g. property of the managed investment scheme).
Most custody providers in Australia are major domestic and international banks or specialised trustee companies. The industry is highly concentrated, with a small number of major custodians holding a significant portion of assets in custody.
Report 291 aims to inform responsible entities, the custodial industry and users of custodial and depository services about the custodial industry, the current regulatory regime and matters that ASIC considers to be ‘good practice’. It reflects ASIC’s current regulatory position and is not intended to imply any new regulatory requirement or standard.
Separately, ASIC will issue a consultation paper on proposed changes to the financial resource requirements of custodians in the near future. This is part of a more general review of financial requirements that ASIC is undertaking for sectors within the financial services industry. ASIC has already issued revised financial requirements for operators of managed investment schemes (refer 11-242MR) and has consulted on revised requirements for electricity derivative issuers (refer 12-86MR) and entities providing OTC derivatives for retail clients (refer 11-92MR).
ASIC’s submission to the Parliamentary Joint Committee on Corporations and Financial Services (PJC) inquiry into the Trio collapse set out its role and forward plan of work to help strengthen the financial system, including plans to review custodian businesses and issue a public report into the sector.
The PJC Inquiry report into Trio was released on 16 May 2012 and made a number of recommendations that touched on the role and work of custodians.
ASIC is considering the report’s recommendations and will respond to the PJC separately.
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