Summary

  • ASIC has released class orders implementing changes to the financial requirements for responsible entities and platform operators holding scheme property or other assets or IDPS property and for custodians.
  • The new requirements include:
    • increased NTA requirements for REs holding scheme property or assets and for platform operators holding IDPS property or assets: from $5 million (or, for REs, the greater of $5 million or 10% of average RE revenue) to the greater of $10 million or 10% of average RE and IDPS revenue;
    • REs and IDPS operators relying on a custodian will generally need to obtain assurance that the custodian complies with the new financial requirements, unless it is an ‘eligible custodian’; 
    • increased NTA requirements for custodians (other than incidental custody providers): from $5 million to the greater of $10 million or 10% of average revenue;
    • a new NTA requirement for ‘incidental providers’ of custodial or depository services (which may include trustees of unregistered schemes): equal to the greater of $150,000 or 10% of average revenue. This NTA requirement does not apply where they outsource custody of the relevant financial products to a custodian, so incidental providers will need to decide whether to outsource custody and the impact of custody costs and compliance with applicable conditions;
    • 12-month cash flow projections for custodial or depository services providers; and
    • new NTA liquidity requirements for providers (other than incidental providers outsourcing custody to a custodian).
  • The new requirements apply from 1 July 2014 for licensees holding the relevant custody, registered scheme or IDPS licence authorisation as at 30 June 2013 although REs may elect to comply earlier.
  • Licensees who acquire the relevant authorisations after 1 July 2013 will need to comply with the new requirements on and from that licence issue or variation. 

Background

ASIC has released the following new class orders implementing changes to the financial requirements for responsible entities (REs) and platform operators holding scheme property or other assets or IDPS property and for custodians:

  • [CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services (Class Order 13/760); and
  • [CO 13/761] Financial requirements for custodial or depository service providers (Class Order 13/761).

ASIC has also updated ASIC Regulatory Guide 166 Licensing: Financial requirements (RG 166).

These releases follow the issue of Consultation Paper 194: Financial requirements for providers of custodial or depository services (CP 194) in November 2012. For more information on CP 194, please see our article ‘ASIC consults on revised financial requirements for custodians and REs and platform operators holding assets’.1

Although currently these requirements generally do not apply to bodies regulated by APRA, from 1 July 2015, a RSE licensee that is also the responsible entity of a registered scheme will also need to comply with the relevant financial requirements.

When do the new requirements apply?

The requirements under ASIC Class Order 13/760 commence:

  • for licensees that held a licence authorising the operation of a registered scheme or an IDPS on 30 June 2013 – 1 July 2014. REs can elect to have the requirements apply from an earlier time by lodging with ASIC and publishing on their website a notice of reliance on the Class Order; and
  • otherwise – on 1 July 2013. This means that licensees who, after 1 July 2013, expand their licence authorisations to include operating schemes or an IPDS, and entities which are issued with a new licence with those authorisations, will need to comply with Class Order 13/760 from the date of that licence variation or issue. 

The requirements under Class Order 13/761 commence:

  • for licensees that held a licence covering custodial or depository services on 30 June 2013 – on 1 July 2014; and
  • otherwise – on 1 July 2013. This means that licensees who, after 1 July 2013,  expand their licence authorisations to include custody and entities which are issued with a new licence covering custody will need to comply with Class Order 13/761 from the date of that licence variation or issue. 

Responsible entities and IDPS operators holding scheme assets

Previously, a RE that held scheme property or assets was required to hold net tangible assets (NTA) of 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 held IDPS property or other assets of the IDPS was required to hold in NTA at least $5 million.

Under ASIC Class Order 13/760 a licensee holding scheme property or other assets of a registered scheme or IDPS property must hold NTA of the greater of $10 million or 10% of ‘average RE and IDPS revenue’, subject to limited exceptions relating to ‘special custody assets’ or ‘Tier $500,000 class assets’.

The new requirements also have implications for licensees that have appointed a custodian. 

Generally, where a licensee appoints a custodian (instead of meeting a higher NTA requirement where it holds the assets itself) and the custodian is not an ‘eligible custodian’ (such as an Australian ADI):

  • where the custodian is a licensed custodian, the licensee must reasonably believe the custodian is not an ‘incidental provider’ and complies with the financial requirements applicable to custodians; or 
  • where the custodian is not a licensed custodian, certain conditions must be satisfied, including the licensee obtaining written assurances from the custodian that it complies with certain financial requirements applicable to custodians (even though the custodian would not otherwise be subject to those requirements as it is not a licensed custodian).

Class Order 13/760 has a transitional period until 1 July 2014 where a RE or IDPS operator can rely on certain custodians holding $5 million in NTA (instead of the greater of $10 million or 10% of ‘average revenue). 

Licensees who appoint a custodian will need to have arrangements in place to ensure that they comply with the applicable conditions.

Custodians

Under Class Order 13/761, licensees authorised to provide custodial or depository services that are not ‘incidental providers’ will need to:

  • hold NTA of the greater of $10 million or 10% of ‘average revenue’ (previously the NTA requirement was $5 million);
  • prepare 12-month cash flow projections and will have a tailored audit requirement; and
  • hold at least 50% of the required NTA in cash or cash equivalents, with 100% being held in liquid assets.

Incidental providers of custodial or depository services

What is an incidental provider?

Previously, under RG 166, the NTA requirements applicable to custodians did not apply to a licensee where the provision of custodial or depository services by the licensee was ‘incidental’ to another financial service provided by the licensee or a related body corporate. 

Trustees of unregistered schemes commonly relied on the custodial or depository services being ‘incidental’, with the result that no NTA requirement would apply.

An ‘incidental provider’ is now defined in Class Order 13/761 as a licensee authorised to provide custodial or depository services:

  • that does not provide any custodial or depository services other than services which:
    • are a need of the person to whom the services are provided because of, or in order to obtain, the provision of other financial services by the licensee or its related bodies corporate; and
    • do not form part of an IDPS; and
  • whose ‘custodial or depository services business revenue’ is less than 10% of its ‘financial services business revenue’.

The revenue attributable to custodial or depository services must at least include the cost of providing those services and in each case, the revenue includes that of the licensee’s related bodies corporate.

New requirements for incidental providers

Under Class Order 13/761, ‘incidental providers’ must:

  • hold NTA of the greater of $150,000 or 10% of ‘average revenue’;
  • prepare 12-month cash flow projections and will have a tailored audit requirement; and
  • hold at least 50% of the required NTA in cash or cash equivalents, with 100% being held in liquid assets.

ASIC had proposed in CP 194 to introduce a NTA requirement for providers of ‘incidental custodial or depository services’ regardless of whether the licensee appoints a custodian that complies with the financial requirements for custodians.  

This proposal would have had significant capital implications for incidental providers who use custodians, particularly trustees of unregistered schemes. Fortunately, Class Order 13/761 provides an exemption from the NTA and liquidity requirements for ‘incidental providers’ that appoint a custodian to hold all the relevant assets (being financial products or beneficial interests in financial products) to which the custodial or depository services provided by the licensee relate. The exemption only applies where the incidental provider reasonably believes the custodian is not itself an ‘incidental provider’ and complies with the relevant financial requirements or where the custodian is an ‘eligible custodian’.

Trustees of unregistered schemes that are ‘incidental providers’ will be faced with a decision about whether to outsource custody and will need to consider the impact of any such custody costs and compliance with the applicable conditions.