On 22 June, following an industry review of custody of assets, ASIC released a report of its findings which indicated that custody of assets is and will remain its focus going forward and that it will continue to engage with industry and industry bodies in this area. Importantly, ASIC indicated it expects entities providing custodial services to review the findings of its report and to incorporate the recommendations into entities’ own policies and operational practices. ASIC intends to take action where deficiencies in policies and operational practices are identified so it is important that responsible entities and custodians take note of this Report.
ASIC released Report 531 Review of compliance with asset holding requirements in funds management and custodial services (Report) following its review of asset holders, including responsible entities and custodians, to assess their compliance with Regulatory Guide 133 Managed Investments and custodial or depository services: Holding assets (RG 133) and related instruments.
RG 133 explains the obligations that apply to Australian financial services licensees in relation to holding assets and sets out minimum standards for asset holders.
The Report states that the review found that there was generally a poor level of understanding of the requirements in RG 133 by the responsible entities and smaller custodians that were reviewed by ASIC.
Examples of the areas in which ASIC found the most instances of non-compliance or poor practice were the following:
- Many responsible entities having poor knowledge and understanding of the requirements of RG 133 and acceptable practice, suggesting that asset holding suggesting that asset holding and administration was not prioritised by the board and compliance team.
- In relation to custody agreements, some entities did not have custody agreements that complied with the content requirements of RG 133. Further, some entities did not hold executed copies of all current custody agreements.
- Changes in ownership of the responsible entity or changes to custodian causing additional operational risk during the transition.
- Entities having inadequate compliance resources.
- The reliance on many diverse systems and manual processes thereby increasing operational risk.
- Self-custody entities revealing a lack of understanding of conflicts of interest that exist because of the dual in-house responsible entity and custody functions.
- Cost, rather than quality of service, being a significant driver for responsible entities in selecting custodians (and custodians in selecting sub-custodians) and inadequate monitoring of custodians by responsible entities (for example, a responsible entity relying on self-certification by the custodian).
- A lack of understanding that RG 133 applies to the custody of assets of unregistered schemes.
Some of the recommendations made by ASIC for improving compliance include the following:
- Responsible entities and custodians should review their custody arrangements and ensure they comply with the minimum standards set out in RG 133.
- Responsible entities and custodians should review, and if necessary, revise their custody agreements to ensure they comply with the content requirements in RG 133 and relevant instruments.
- Entities should review, and if necessary, amend their risk management arrangements against Regulatory Guide 259 Risk management systems of responsible entities.
- Responsible entities and custodians should review ASIC’s guidance in RG 133 and RG 181 Licensing: Managing conflicts of interest, and if necessary, restructure their arrangements to ensure that conflicts management is adequate, implemented and maintained. ASIC expects there to be complete functional separation between the responsible entity function and the custodial function, including different staff and reporting lines.
- Responsible entities and custodians should review ASIC’s guidance in RG 133 and, where necessary, revise their selection policies for custodians and sub-custodians in accordance with the requirements in RG 133 and relevant instruments and avoid reliance on the self-certification of custodians to replace independent monitoring.
- Licensees should review ASIC’s guidance regarding financial resource requirements and if necessary, restructure their arrangements.
- Responsible entities and custodians should review the custody arrangements for unregistered schemes where custodial or depository services are provided to ensure they comply with the minimum standards in RG 133.
The release of the Report is a timely reminder for responsible entities and custodians to review their custody arrangements in light of ASIC’s findings and recommendations in the Report.