Following its consultation with industry during the first half of 2013, ASIC has introduced new financial requirements for providers of custodial and depository services, responsible entities and investor directed portfolio service (IDPS) operators who hold IDPS assets.
The new requirements
A summary of ASIC’s proposals put forward in Consultation Paper 194 can be found here. The majority of ASIC’s proposals have now been adopted (subject to the limited change for incidental providers set out below). These include the doubling of the minimum net tangible assets (NTA) requirements for some providers, from $5million to $10million.
The amendments have been effected by new Class Orders [CO 13/760] and [CO 13/761]. An updated Regulatory Guide 166 (Financial Requirements) has also been published, which can be found here.
Key change to original proposals – incidental providers
ASIC has introduced an exception from the NTA requirement for incidental providers of custody services where holding of the assets to which the service relates is outsourced to a custodian that is not an incidental provider and meets the new financial requirements, or to an “eligible custodian”. This means that for incidental providers only the custody of financial products needs to be outsourced to a relevant custodian in order for the relevant NTA requirements to not apply (as opposed to outsourcing of custody of all assets, such is generally the case for responsible entities).
To be considered an “incidental provider” a licensee must ensure (amongst other things) that it’s “custodial or depository services revenue”, being the licensee’s reasonable estimate of the revenue of it and its related bodies corporate attributable to the custodial service for the relevant financial year, is less than 10% of the financial services business revenue of its group.
ASIC has confirmed in the definition of “custodial or depository services revenue” that it must at least include the cost of providing the service. ASIC has provided guidance in the new Regulatory Guide 166 that where “custodial or depository services revenue” is bundled, not charged or otherwise unidentifiable, it expects the licensee to calculate the revenue based on the costs of providing the service, including a share of fixed costs and the cost of capital.
Other points to note
Custodial service providers and IDPS operators now also need to comply with a tailored cash needs requirement and tailored audit requirement.
Incidental custodial service providers are required to have the incidental nature of the services confirmed annually by an external auditor under the tailored audit requirement.
The new financial requirements will apply from 1 July 2013 for both new licensees and for existing licencees who apply to hold one of the relevant authorisations after 30 June 2013.
For existing licensees who already hold the relevant type of authorisation, there will be a one year transition period, with compliance required from 1 July 2014.