The long awaited thematic review of custody arrangements (Review) has now been completed and FMA have released their summary findings:

The findings of the Review were overall positive with 99.95% of MIS assets being held in custody appropriately. However, some key areas for consideration/improvement include:

Longer-term licensing

Whether there should be a requirement for licensing of custodians has been a long standing issue following recommendations from the IMF back in 2017. The FMA has not provided a definitive view on this but it does identify issues with the current regulatory regime for custodians (set out below) and licencing may be considered in the longer term. At this stage, the FMA first plans to consider the issues that arose from the Review and provide guidance to industry on its expectations.

Wholesale funds

The review noted the majority of all retail scheme property (73%) is invested in other managed funds, generally wholesale funds. Custody is not regulated for wholesale funds so it was recommended that “MIS managers to perform and document due diligence on the custodial arrangements of the wholesale funds they consider investing in, to ensure that retail scheme property held by the other managers is secured to the level required under the FMC Act. We expect supervisors to provide oversight of these practices.”

Scheme property not held in custody

The FMCA requires all scheme property to be held in custody. While more than 99.95% of scheme assets are held in custody, there were certain types of bespoke assets that did not have custodians. These included OTC derivatives and call accounts and term deposits with trading banks. 1% of term deposits were not held with a custodian and 18% were held by a specialist custodian. It was noted than the majority of specialist custodians do not accept bank accounts and term deposits into custody. In respect of derivatives, New Zealand law does not create any exception for these types of assets so they should be held in custody. FMA plans to provide further guidance about its expectations in light of these issues.

Supervisor oversight

The review noted the distinction between specialist custodians and supervisions acting as custodians. The latter situation raised an issue with supervisors frequently delegating administrative tasks back to fund managers. While not technically prohibited, this practice was said to weaken the structural separation of custodian functions.


FMA is considering how the Review findings might fit with platform arrangements given similar issues apply in those areas where safety and custody of assets is fundamental. FMA is currently doing some research as these platforms fall into a regulatory grey area in New Zealand.

Assurance Review Practices

The review found inconsistencies in implementation of annual audit (assurance) engagements.

Next steps

In light of the above weaknesses and issues, FMA will engage with industry to clarify and reinforce its expectations of custodians. It will also consider whether licensing of custodians might be appropriate in the longer term.