ASIC has recently released a new consultation paper proposing changes to the financial requirements for providers of custodial or depositary services and responsible entities of managed investment schemes and platform operators that hold scheme property or other property and assets. Background on the proposed changes can be found in ASIC’s media release.
This follows the release of ASIC Report 291 into custodial and depositary services in Australia released in July 2012 and other reviews by ASIC into the financial requirements for Australian financial services licensees, including the new requirements for responsible entities that came into force on 1 November 2012.
The proposals include:
These proposals may have significant implications not just for custodians but also for responsible entities holding scheme assets and for trustees of unregistered managed investment schemes who provide custodial or depositary services.
These proposals will be most significant for licensees that currently provide ‘incidental’ custodial or depositary services.
ASIC notes that some businesses are set up mainly to provide custodial or depositary services, as opposed to businesses where these services are incidental, and uses the term ’Custodian’ to describe these licensees.
ASIC states that where a responsible entity relies on a person it appoints to hold scheme property or other assets to avoid having to meet financial requirements that would apply if the responsible entity held the property or assets, the responsible entity must have reasonable grounds to believe the person meets the cash flow projection requirement and the liquidity requirement. ASIC expects this would include obtaining a copy of the required projections and audit reports applying to Custodians.
The calculation of ’average revenue’ depends on the number of years the licensee has been authorised to provide a custodial or depositary service.
Responsible entities and IDPS operators holding scheme assets
Currently, a responsible entity that holds scheme property or assets is required to hold in NTA the greater of $5 million or 10% of average responsible entity revenue, subject to limited exceptions and an operator of an investor-directed portfolio service (IDPS) that holds property or other assets of the IDPS is required to hold in NTA at least $5 million.
ASIC proposes that the proposed increased NTA requirements applicable to Custodians should also apply to:
The proposals raise a number of practical implications for responsible entities, including whether any amendments to custody agreements are required or desirable to take into account the new requirements for Custodians, to provide responsible entities with rights to access to cash flow projections and to provide warranties regarding compliance with the new requirements.
Incidental providers of custodial or depositary services
Currently, under ASIC Regulatory Guide 166 Licensing: Financial requirements, the NTA requirements applicable to custodians do not apply to a licensee where the provision of custodial or depositary services by the licensee is ’incidental’ to another financial service provided by the licensee or a related body corporate.
ASIC now proposes to define the term ’incidental custodial or depositary services‘ and to introduce a NTA requirement for incidental providers.
Under the proposal, a licensee would provide ’incidental custodial or depositary services‘ if:
ASIC notes that a trustee of an unregistered scheme (other than an IDPS) that provides custodial or depositary services (which occurs after providing financial product advice and/or dealing services) is an example of a licensee that may fall within the first part of the definition.
Only a licensee providing custodial or depositary services within the definition of ‘incidental custodial or depositary services’ would be eligible for the reduced NTA requirements, as compared to Custodians.
These proposals are significant for licensees that operate unregistered managed investment schemes (such as unit trusts and investment platforms only available to wholesale clients) and are not otherwise currently required to meet any NTA requirements, particularly given the proposal for the introduction of a NTA test based on the licensee’s revenue.
Proposed timetable for implementation:
ASIC has proposed the following timetable for implementation:
Submissions on CP 194 are due by 14 January 2013.
Should you be seeking a responsible entity or trustee, One Investment Group is well placed to provide responsible entity and trustee services, holding 6 Australian Financial Services Licences with in excess of 100 managed investment schemes.