Investment fund ‘custodians’ in the spotlight

The Australian Securities and Investment Commission (ASIC) has identified significant issues in the custodial services industry.

Custodial services are operated by major financial institutions with NAB holding 30% and other large providers including JPMorgan and Citigroup. Custodial services hold $1.82 trillion of consumer’s money from superannuation funds, managed investment funds, and insurance companies. This amount is expected to increase, with it estimated that in 15 years time custodians will hold $6.4 trillion of assets.

The recent Parliamentary Joint Committee (PJC) on Corporations and Financial Services inquiry into the collapse of Trio Capital drew attention to problems with the operation of custodial services.

The PJC found that custodians do nothing to protect superannuation funds or investors from fraud, stating that they ‘make no independent checks before transferring money offshore’, and instead they ‘simply act on the instructions of the responsible entity’.

In response to these findings ASIC commissioned a report into the operation and regulation of custodial services.

The PJC recommended that the word ‘custodian’ is inappropriate and that ASIC should find another term ‘which does not give unwarranted reassurance to investors’. This was in response to the significant expectations gap which existed ‘between what retail investors understand as the role of the custodian and what a custodian is legally required to do’.

ASIC took note of these recommendations and has urged those in the custodial industry to continue to ‘recognise their gatekeeping role and the opportunities for misconduct associated with this role’.

In response to the PJC’s concerns about the term ‘custodian’ ASIC Commissioner Greg Tanzer said that ASIC are ‘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 the custodian’.

ASIC recommended that instead of the title ‘custodian’, ‘depository’ should be used to minimise the unrealistic reassurance provided to consumers by the previous term.

Custodial services play an central if somewhat hidden role in managing the majority of Australian consumers’ investments including superannuation. This demands that their actions and obligations be clear to investors, and that they take all reasonable care and responsibility to protect against fraud and theft.