Summary

  • ASIC has updated and expanded its requirements for REs, custodians and IDPS and MDA operators in relation to the holding of assets, including:
    • minimum standards,
    • content requirements for custody agreements,
    • expanding the types of ‘special custody assets’ a RE or IDPS operator may hold without having to meet potentially higher NTA requirements,
    • varying the relief applicable to REs permitting omnibus accounts and extending  similar relief to custodians and IDPS and MDA operators.
  • The new requirements are being implemented in stages, depending on whether an affected licensee held the relevant licence on or before a specified date.
  • REs and asset holders will need to review and update their custody arrangements and check that they have the necessary procedures and policies in place before the applicable implementation date.

Background

ASIC has updated and expanded its requirements for responsible entities (REs), custodians and IDPS and MDA operators in relation to the holding of assets, including:

  • minimum standards,
  • content requirements for custody agreements,
  • expanding the types of ‘special custody assets’ a RE or IDPS operator may hold without having to meet potentially higher NTA requirements, and
  • varying the relief applicable to REs permitting omnibus accounts and extending  similar relief to custodians and IDPS and MDA operators.

The new publications released by ASIC include:

  • an updated version of ASIC Regulatory Guide 133 now called ‘Managed investments and custodial or depository services: Holding assets’ (RG 133),
  • an updated version of ASIC Regulatory Guide 166 Licensing: Financial requirements (RG 166), and
  • multiple class orders modifying the Corporations Act to introduce the new requirements.

This follows the release of ASIC Consultation Paper 197 Holding scheme property and other assets (CP 197) in December 2012 which sought comments on proposed changes to the then RG 133.  For more information on CP 197, please see our article 'ASIC consults on changes to scheme property and other assets'1.

Who is affected by the changes?

The new requirements are relevant to:

  • REs of registered managed investment schemes,
  • licensed providers of custodial or depository services (licensed custody providers), including those who provide custody services merely incidentally (eg trustees of unregistered schemes),
  • MDA operators who are responsible to clients for holding assets under a MDA service, and
  • IDPS operators who are responsible to clients for holding assets under an IDPS.

Holding client assets and meeting minimum standards 

ASIC has modified the Corporations Act by various class orders so that asset holders will be required to meet minimum standards for:

  • organisational structure,
  • staff capabilities,
  • capacity and resources, and
  • holding assets on trust including the obligation to hold assets separately.

Similar requirements already applied to REs under the previous version of RG 133.

The requirements cover REs, custodians for REs, licensed custody providers (including incidental providers) and IDPS and MDA operators.

For a licensee that engages another asset holder (eg a RE appointing a custodian), the licensee must ensure the asset holder meets the standards.

All relevant asset holders should review their arrangements and ensure that they have procedures in place to comply with the standards, including required policies.

Engaging another asset holder and client checks

Under the updated RG 133, ASIC expects:

  • process: REs, licensed custody providers, MDA operators and IDPS operators to follow a reasonable documented process in selecting an appropriate asset holder or master custodian, and
  • due diligence: asset holders that are licensees to conduct pre-contract inquiries, and subsequent inquiries when appropriate, in relation to their clients.

Agreement with third party asset holder 

There are a number of new requirements for custody agreements. For example, there are new requirements relating to:

  • notification by the custodian to the client (or for REs, the RE’s board or relevant compliance committee) of material or systemic breaches of the agreement by the custodian or the client,
  • the custodian’s business continuity arrangements,
  • reasonable liability provisions, including if appropriate reasonable indemnity provisions in relation to losses caused by the acts and omissions of the asset holder,
  • termination provisions, including the client’s rights of termination in certain circumstances and in relation to the transfer of assets, and
  • appointment of sub-custodians.

There are no grandfathering provisions for existing custody agreements. This means that existing custody agreements will need to be amended to address the new requirements before the relevant implementation date.

Affected licensees entering into new custody arrangements prior to the relevant implementation date may prefer to address the new requirements now, rather than amend later.

There are also separate requirements for agreements entered into by licensed custody providers with retail clients.

Reporting suspicious matters

REs’ custody agreements must oblige the custodian to have adequate arrangements to ensure that it will report to ASIC within 10 business days if the custodian suspects that the RE  may be in beach of:

  • section 912D, which relates to licensees reporting significant breaches to ASIC, or
  • section 60FC(1)(l), which relates to REs reporting certain breaches relating to the scheme to ASIC.

ASIC considers that custodians that hold scheme property may have information that could give rise to a suspicion and that the requirement will address areas not covered by the anti-money laundering legislation.

Relief from the requirement to hold assets separately

The current omnibus accounts relief for REs under ASIC Class Order 98/51 Relief from the duty to separate assets of a managed investment scheme will be revoked on 1 January 2015.

New relief is provided under ASIC Class Order 13/409 (for Australian or foreign currency, certain deposit taking facilities, securities or derivatives) but it is subject to additional conditions. These additional conditions which REs will need to make sure that they can comply with include:

  • a requirement for a written policy which is reviewed at least every 13 months, and
  • a requirement for the RE to do all things necessary to ensure:
    • adequate records are kept showing the scheme’s entitlement,
    • reconciliations are performed on each business day, subject to a limited exception relating to the nature of the property, and
    • that if the account is insufficient to meet the entitlement of all persons in relation to the account, the insufficiency ceases within 2 business days.

Similar relief will apply to licensed custody providers, IDPS operators and MDA operators under ASIC Class Orders 13/410, 13/763 and 04/94 respectively.

Land used in primary production schemes

ASIC has also modified the Corporations Act by class order to apply additional requirements to REs in relation to registered schemes involving primary production that include rights for use of land offered on or after 2 January 2014. The requirements apply from 1 July 2014 to all responsible entities of relevant schemes.

Use of the term ‘custodian’

For retail clients, ASIC expects REs, IDPS operators and MDA operators to explain the limited role of a custodian (including the limited nature of the services undertaken) in any product disclosure statement, financial services guide or IDPS guide and in communications with the client that refer to the custodian.

Special custody assets

In the updated RG 166, ASIC has extended the list of ‘special custody assets’ a RE or IDPS operator may hold without meeting the relevant net tangible asset requirements in RG 166 to include the following, subject to conditions:

  • for REs, derivatives with liability attached and associated margin accounts and certain private equity investments, and
  • certain deposit-taking facilities.

Licence conditions 

As requirements have been introduced by class order and impose different requirements to those already set out in relevant licence conditions for existing licensees, affected existing licensees must be aware of and comply with the requirements under the relevant class orders and not have regard only to their licence conditions.

What is the timetable for implementation?

The new requirements are being phased in, with implementation dates depending on when the relevant licensee held the relevant licence authorisation.

For example, the new custody agreement requirements for REs commence:

  • for REs authorised to operate a registered scheme before 2 January 2014 – on 1 November 2015, and
  • otherwise – on 2 January 2014.