ASIC has strengthened the financial requirements for custodial and depository service (custody) providers. The new rules also apply to asset holders for registered schemes or investor directed portfolio services (IDPS).
Custody providers and asset holders are key service providers in the financial services industry and play a significant role in the safekeeping of client assets. As at 31 December 2012, approximately $2.065 trillion of assets of Australian investors were held in custody. This figure is expected to more than triple over the next 15 years to $6.4 trillion.
‘There is a degree of risk associated with providing any custodial or asset holding service,’ ASIC Commissioner Greg Tanzer said.
‘Investors must be confident that these important gatekeepers, who are responsible for safekeeping other people’s financial assets, have adequate financial resources to provide these services.’
Under the changes, custodians (not including incidental providers) and asset holders will be required to hold net tangible assets (NTA) amounting to the greater of:
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$10 million, or
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10% of average revenue.
Providers who meet the definition of ‘incidental provider’ will be required to hold NTA amounting to the greater of:
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$150,000, or
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10% of average revenue.
All custody providers and asset holders will be subject to new requirements regarding the preparation of cash flow projections and liquidity.
The changes are outlined in updated Regulatory Guide 166 Licensing: Financial requirements (RG 166) and implemented through a class order.
Background
The new financial requirements will apply from 1 July 2013 for new licensees. For existing licensees, there will be a one year transition period and compliance will be required from 1 July 2014.
The requirements form part of ASIC’s wider review of the financial requirements applicable to Australian financial services (AFS) licensees, and follow ASIC’s report on the custody industry (refer 12-155MR). ASIC consulted on the requirements in November 2012 (refer 12-279MR).
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.
Download:
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Consultation Paper 194 Financial requirements for custodial or depository service providers (CP 194)
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Report 352 Response to submissions on CP 194 Financial requirements for custodial or depository service providers (REP 352)
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[CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services
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[CO 13/761] Financial requirements for custodial or depository service providers