ASIC has released a Consultation Paper on proposed new financial requirements for providers of custodial and depository services, responsible entities and IDPS operators who hold IDPS assets. Consultation Paper 194: Financial requirements for custodial or depository service providers, and ASIC’s media release are available here. ASIC is seeking responses to the proposals by 14 January 2013.

The proposed new financial requirements significantly increase the current financial requirements for some licensees and require responsible entities to closely monitor the financial status of their custodians. The proposals form part of ASIC’s wider review of the financial requirements applicable to Australian financial services licensees, and follow ASIC’s report on the custody industry released earlier this year (Report 291: Custodial and depository services in Australia, available here.)

Who is affected by the proposals?

The proposals affect:

  • custodians
  • operators of investor-directed portfolio services (IDPS) that hold IDPS assets
  • responsible entities of registered managed investment schemes and
  • providers of custodial or depository services that consider their service “incidental” to other financial services (such as trustees of some wholesale unregistered schemes).

For custodians

NTA: ASIC is proposing that providers of custodial or depository services be required to hold net tangible assets (NTA) equal to the greater of:

  • $10 million (up from the current $5 million) or
  • 10% of average revenue.

The introduction of an average revenue measure is consistent with the new NTA requirements imposed on responsible entities from November 2012. “Average revenue” would capture revenue from the licensee’s entire business, not just its custody services. ASX-listed parents will generally not be permitted to provide “eligible undertakings” to support the custodian’s NTA, and the NTA calculated to be held will be reduced by the maximum potential liability under personal guarantees provided by the custodian (subject to certain exceptions).

Liquidity requirement: The NTA must be held:

  • 50% in cash or cash equivalents and
  • 100% in liquid assets.

Cash flow projection: The current options for meeting the cash needs requirement are proposed to be replaced with a rolling cash flow projection, covering at least the next 12 months. The cash flow projection must:

  • be approved by the directors of the custodian at least quarterly
  • demonstrate that the custodian will have access to sufficient financial resources to meet its liabilities over the projected period and
  • demonstrate that the custodian will hold the required cash or cash equivalent assets.

Emission units: ASIC makes it clear that licensees who hold emission units on another’s behalf, including carbon market participants, will be subject to the proposed new requirements for custodians.

For responsible entities and IDPS operators

Responsible entities will be aware of the new NTA and other financial requirements which have applied from November 2012. ASIC is proposing further changes to the NTA requirements applicable to responsible entities.

ASIC proposes that the NTA requirements for custodians, summarised above, will apply to responsible entities and operators of IDPSs where responsibility for holding scheme or IDPS assets is not outsourced to a custodian which meets the new financial requirements (or is an “eligible custodian”). This means that the minimum NTA requirement for those responsible entities will be increased from $5 million to $10 million NTA (and the additional 10% of average RE revenue requirement will continue to apply). (The current exceptions available to responsible entities holding limited classes of assets such as “special custody assets” will, however, continue to apply.)

It is not only self-custody responsible entities who are affected. Where the holding of assets is outsourced, responsible entities must be able to demonstrate that their custody service provider complies with the new financial requirements. It is likely that existing custody agreements will need to be amended to reflect the new financial requirements, and to ensure that custodians are required to provide appropriate reporting to their clients.

For providers of “incidental” custody services

Currently providers of “incidental” custody services, such as trustees of some wholesale unregistered trusts, are not subject to a minimum NTA requirement.

In response to the uncertainty surrounding the meaning of “incidental”, ASIC is proposing to introduce a definition of “incidental custodial or depository services”. A custody service will be incidental if, in summary:

  • the client needs the custody service because of, or to obtain, other financial services provided by the licensee or its related bodies corporate
  • the custody services do not form part of an IDPS and
  • the revenue of the licensee and its related bodies corporate reasonably attributable to the custody service comprises 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.

This last element of the definition requires revenue to be attributed to custodial or depository services, which will likely prove difficult where custody services form a component of a range of services provided to a client. How will the trustee of a trust attribute a portion of its fee to holding trust assets?

ASIC also proposes to introduce a new NTA requirement for these “incidental providers”, equal to the greater of:

  • $150,000 or
  • 10% of average revenue.

Incidental providers will also be required to comply with the new cash flow projection requirement which is proposed for custodians, as well as a similar NTA liquidity requirement. There will also be a requirement to have the incidental nature of the services confirmed annually by an external auditor. Incidental providers who service retail clients will be required to make disclosures in their financial services guides and statements of advice.


ASIC is seeking responses to the proposals by 14 January 2013.

It is proposed that the new financial requirements will apply from 1 July 2013 for new licensees. For existing licensees, there will be a one year transition period and compliance will be required from 1 July 2014.