The proposals in brief
- ASIC has 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.
The proposals include: increasing the NTA requirements for custodians (other than incidental providers) from $5 million to the greater of $10 million or 10% of average revenue;
- increasing the NTA requirements for REs holding scheme property or assets and platform providers holding IDPS property or assets from $5 million to the greater of $10 million or 10% of average revenue;
- introducing a NTA requirement for ‘incidental’ providers of custodial or depositary services (which may include trustees of unregistered schemes) equal to the greater of $150,000 or 10% of average revenue;
- requiring providers to produce 12-month cash flow projections; and
- introducing NTA liquidity requirements for providers.
- These proposals have significant implications not just for custodians generally but also for responsible entities holding scheme assets and for trustees of unregistered schemes who provide custodial or depositary services.
- These proposals will be most significant for licensees that currently provide ‘incidental’ custodial or depositary services.
- Submissions are due by 14 January 2013.
On 14 November 2012, ASIC released Consultation Paper 194: Financial requirements for providers of custodial or depositary services (CP 194) 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.
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 (REs) that came into force on 1 November 2012. For more information on ASIC Report 291, please see our article ‘ASIC’s report on custody and depository services has some important take outs for REs’.1
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.
- to increase the net tangible assets (NTA) requirements applicable to Custodians from $5 million to the greater of $10 million or 10% of average revenue;
- in determining NTA, that ’adjusted liabilities’ would include the maximum potential liability of any personal guarantee given by the Custodian, with certain exceptions for stapling arrangements;
- that a Custodian should be required to prepare 12-month cash flow projections, including a tailored audit requirement;
- that at least 50% of the required NTA should be held by a Custodian in cash or cash equivalents, with 100% being held in liquid assets; and
- that a Custodian should report its NTA position to ASIC as part of its annual submission of its financial statements.
ASIC states that where a RE 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 RE held the property or assets, the RE 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 RE that holds scheme property or assets is required to hold in NTA the greater of $5 million or 10% of average RE 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:
- a RE holding scheme property or assets (other than ’special custody assets’ or ’Tier $500,000 assets’) unless the RE appoints a Custodian that it reasonably believes meets the financial requirements or is an eligible custodian (such as an Australian ADI); and
- an operator of an IDPS that is responsible for holding IDPS property unless it arranges for the IDPS property to be held by a Custodian or an eligible custodian (such as an Australian ADI).
The proposals raise a number of practical implications for REs, including whether any amendments to custody agreements are required or desirable to take into account the new requirements for Custodians, to provide REs 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:
- the custodial or depositary services are a need of the client because of, or in order to obtain, the provision of other financial services by the licensee or its related bodies corporate;
- the service does not form part of an IDPS; and
- the revenue of the licensee and its related bodies corporate reasonably attributable to the custodial or depositary services (which at least includes the cost of providing those services) comprise less than 10% of total revenue derived from the financial services business of the licensee and its related bodies corporate in the last financial year.
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.
- to introduce a requirement for incidental providers to hold NTA equal to the greater of $150,000 or 10% of average revenue (the proposed definition of ‘average revenue’ under CP 194 is not confined to revenue from providing custodial or depositary services and relates to all of the licensee’s revenue);
- that an incidental provider is required to disclose that it may not and is not required to meet the financial requirements for custodians generally (which may be stated in a relevant Financial Services Guide or Statement of Advice given to retail clients);
- that an incidental provider is required to lodge with ASIC a statement in the audit report, for each financial year in which the incidental provider was authorised to provide custodial or depositary services, that having reviewed the financial statements for each related body corporate, the auditor has no reason to believe that the incidental provider did not meet the revenue condition in the definition of ’incidental custodial or depositary services‘ for the financial year; and
- that an incidental provider is required to comply with the same 12-month cash flow projection requirements, and NTA liquidity requirements, proposed for custodians generally.
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 only operate unregistered 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.
What is the proposed timetable for implementation?
ASIC has proposed the following timetable for implementation:
- for new providers, a start date of 1 July 2013; and
- for existing providers, responsible entities and IDPS operators, a transition period of 12 months until 1 July 2014.
Submissions on CP 194 are due by 14 January 2013.