On 1 July 2014, ASIC's one year grace period to comply with new financial requirements concluded for operators of funds that provide custodial and depository services (incidental providers) who obtained their Australian Financial Services (AFS) Licenses before 1 July 2013.
Previously, if an AFS licensee provided custodial or depository services that were incidental to other financial services they provided, ASIC did not require them to meet any financial requirements imposed on custodians. Most trustees of unregistered funds fell within this exception, because they were considered fund managers, not custodians.
However, ASIC has amended its position in Class Order 13/761 and 'incidental provider' is now defined as an AFS licensee authorised to provide custodial or depository service:
- whose custodial and depository services revenue is less than 10% of its financial services revenue; and
- that does not provide any custodial or depository services other than services which:
- do not form part of an investor directed portfolio service; and
- 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 AFS licensee.
New requirements for incidental providers include:
- a new minimum net tangible asset (NTA) requirement, such that incidental providers must hold assets equal to the greater of $150,000 or 10% of average revenue; and
- a new solvency requirement, such that incidental providers must hold at all times cash or cash equivalents in an amount that is at least 50% of the NTA, and liquid assets in an amount that is at least 100% of the NTA.
These reforms may have significant capital and liquidity implications for incidental providers, particularly trustees of unregistered schemes. Fortunately, incidental providers may be able to avoid these requirements by appointing a qualified custodian to hold their financial products.