|Focus:||Release of revised Regulatory Guide 166: Licensing: Financial requirements|
|Services:||Commercial, Financial Services|
|Industry Focus:||Financial Services, Property|
The Australian Securities and Investments Commission (ASIC) has issued new financial requirements for custodial and depository service providers (custody providers) as well as asset holders for registered schemes and investor directed portfolio services (IDPS). The main amendment is a doubling of the minimum net tangible asset (NTA) requirement for some providers and asset holders from $5 million to $10 million.
The amendments are contained in ASIC Class Order [CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services and [CO 13/761] Financial requirements for custodial or depository service providers. ASIC has also released a revised Regulatory Guide 166 Licensing: Financial requirements (RG 166).
The new requirements began to apply on 1 July 2013 for new licensees and existing licensees that apply to hold one of the relevant authorisations after 30 June 2013. Existing licensees that already hold relevant authorisations have a 12 month transition period and the new requirements will apply to them from 1 July 2014.
Licensees affected by these changes should be reviewing their financial position and the procedures for financial requirements. Licensees that are unable to, or do not wish to, satisfy the increased NTA requirements should be investigating alternative options such as the outsourcing of custodial functions.
Custody providers include banks and specialised trustee companies, as well as AFS licensees that act as trustees of wholesale managed funds.
ASIC draws a distinction between businesses set up mainly to provide custodial or depository services (eg professional trustee companies) and those where custodial functions are performed incidentally to other services (eg nominee services provided in conjunction with stockbroking and custodian functions performed in wholesale trusts incidentally to the advice and / or dealing involved in investment management). ASIC refers to the latter as "incidental providers".
In the new RG 166, ASIC has stated that, in order for an AFS licensee to satisfy the definition of "incidental provider":
- there must be a causal relationship between other financial services and the custody service, such that the custody service would not be needed by the client if the other financial services were not provided, and
- the revenue from custody services must be less than 10% of the licensee's financial services business revenue.
Note that if fees for custody services are not charged, are bundled or are otherwise unidentifiable, revenue from custody services must at least include the cost of providing the service, including a share of fixed costs and the cost of capital.
If the custody provider is not an incidental provider, it must have a minimum NTA of the greater of $10 million and 10% of average revenue.
If the custody provider is an incidental provider, it must have a minimum NTA of the greater of $150,000 and 10% of average revenue. However, no minimum NTA is required for custody services by an incidental provider if all the assets to which the custody service relates are held by certain professional custodians defined in RG 166, including banks and market / clearing participants ("eligible custodians").
For example, a trustee of a wholesale fund that invests in financial products should not require a minimum NTA for custody services if a professional custodian is engaged to hold title to the investments (ie the trustee is only providing an incidental custody service to investors in relation to a beneficial interest in the investments, where legal title / physical custody is held by the professional custodian).
Of the required NTA, at least 50% must be held in cash or cash equivalents, and 100% must be held in "liquid assets" as defined in RG 166.
In addition to the revised NTA requirements, there is also a tailored cash needs requirement that involves the preparation of a cash flow projection of at least 12 months, as well as a tailored audit requirement with specific audit opinions regarding compliance with the NTA and cash flow projection requirements.
Asset holders for registered schemes
Responsible entities of registered schemes that hold scheme assets, and custodians (other than eligible custodians) of registered schemes where the responsible entity does not satisfy ASIC's custody requirements, must hold a minimum NTA of the greater of $10 million and 10% of average responsible entity and IDPS revenue.
Reduced NTA requirements continue to apply for "Tier $500,000 class assets" and "special custody assets".
IDPS operators that perform custodial functions, or that are responsible to clients for holding IDPS assets and where all assets are not held by a professional custodian, must have a minimum NTA of the greater of $10 million and 10% of average responsible entity and IDPS revenue.
Other IDPS operators must have a minimum NTA of the greater of $150,000, 0.5% of average value of scheme property and IDPS property up to $5 million NTA, and 10% of average responsible entity and IDPS revenue.
Tailored cash needs and audit requirements also apply that are similar to those for custody providers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.