Australia: Time to revisit ASIC custodial arrangements

Last Updated: 27 May 2014

By: Nikki Bentley

Responsible entities, licensed custodial providers (including trustees of unregistered schemes), MDA operators and IDPS operators will need to revisit their current processes around custody, and amend their existing custody agreements as a result of an extensive new regime which imposes new requirements on asset holders through ASIC Class Orders1 and which is reflected in the updated ASIC Regulatory Guide 133 and 166.

As these requirements are different to those already contained in a licensees' licence conditions, it is important that licensees are aware of them and do not only have regard to their licence conditions which are to be superseded.


ASIC has imposed minimum standards covering organisational structure, staffing capabilities, capacity and resources, and holding assets on trust. A licensee that engages another asset holder (e.g. a responsible entity appointing a custodian), must ensure the asset holder meets the minimum standards. Whilst responsible entities were already subject to similar requirements, the minimum standards now cover licensed custody providers, including incidental providers of custodial services such as wholesale trustees. Accordingly, asset holders will need to review their arrangements to ensure they have policies and procedures in place to comply with the minimum standards.


There are a number of new contractual requirements for custody agreements. For example, the agreements must contain provisions including, if appropriate, reasonable indemnifying provisions in relation to losses caused by the acts and omissions of the asset holders that relate to the agreement. ASIC suggests that you need to consider the additional cost in not agreeing to any exclusions of liability for direct losses, which assumes that custodians are willing to discuss amending their standard approach to indemnities.

There are no grandfathering provisions for existing custody agreements. This means that existing custody agreements will need to be amended to address these new requirements before November 2015. This gives rise to the risk that unitholders may lose favourable terms, including any current pricing, in any renegotiations.


A novel way to bring service providers that may not be directly regulated by ASIC within the regulatory regime, is ASIC's approach to require custody agreements to impose obligations on custodians. An example of this is the new requirement that custodians will be obliged to report to ASIC if the custodian suspects that the client (ie the trustee) is in breach of its obligation to report significant breaches to ASIC. ASIC considers that custodians may have information that could give rise to a suspicion around non- compliance. Custodians are not required to actively undertake inquiries to ensure the client is complying with its obligations.


For retail clients, ASIC will require responsible entities, IDPS operators and MDA operators to provide clear disclosure around the role of the custodian in retail disclosure documents. This reflects a recommendation of the Parliamentary Joint Committee on Corporation and Financial Services on the collapse of Trio Capital which found there was an expectation gap between the custodians' obligations and investors' expectations of them.


ASIC has recently extended the list of "special custody assets" a responsible entity may hold without having to meet the higher net tangible asset (NTA) requirements. Special custody assets now include derivatives and associated margin accounts and certain deposit-taking accounts, subject to meeting the relevant conditions2.

Responsible entities and IDPS operators should now be engaging with their custodians and auditors to ensure they will be able to meet their NTA requirements.

Unfortunately the carve out for special custody assets does not apply to incidental custodial providers who will be subject to a NTA requirement of $150,000 (or 10% of average revenue) if they hold any assets.


The new requirements are being phased in depending on when you were granted your licence. The class order increasing financial requirements for responsible entities and IDPS operators and custodians3 will apply to existing licensees from 1 July 2014. The new requirements in relation to custodial arrangements already apply in relation to new licensees that were authorised from 2 January 2014, and from 2 January 2015 for existing licensees. The exception to this is the requirements in relation to custody agreements which apply from November 2015 for existing licensees. In addition the current omnibus account relief for responsible entities will be revoked from January 2015 and replaced with new relief.


1ASIC Class order [CO13/1409] Holding assets; Standards for responsible entities; ASIC Class Order [CO13/1410] Holding assets. Standards for providers of custodial or depositing services; ASIC Class Order [CO04/194] Managed discretionary accounts and ASIC Class Order [CO13/763] Investor director Portfolio Services
2[ASIC Class Order 13/1413]
3[CO 13/760] Financial requirements fees responsible entities and operators of investor directed portfolio services and [CO 13/761] Financial requirements for custodial or depositing service 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.

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