ASIC has queried whether custodians should take on a greater role as gatekeepers and report their clients' missteps to the regulators.
"The government might consider whether custodians would be more effective gatekeepers if they were required to identify and report suspicious behaviour and activity of their clients," ASIC said in a submission to the Parliamentary Joint Committee Inquiry into the collapse of Trio Capital last week.
But the corporate regulator did not go as far as making it a recommendation in the submission.
"No change is recommended at this time," it said.
JP Morgan head of treasury and securities services sales and client management Bryan Gray yesterday said custodians already had reporting duties under the existing anti-money laundering regulations administered by the Australian Transaction Reports and Analysis Centre.
"We already do a level of suspicious transaction reporting anyway," Gray said.
"There is the obligation to undertake KYC (know your client) due diligence before we take a client on, so in the first place we have to make sure we are comfortable with the client."
But ASIC said the reporting might not be extensive enough.
"There may be an expectation gap between what is legally required of custodians and what investors expect the custodian to be doing to safeguard their investment," the regulator said.
ASIC will start a review of custodians this year with the objective of issuing a public report about this sector and identifying any issues that might need to be addressed through regulatory reform in 2012.
"We will consider how custodians could be more proactive in identifying and reporting suspicious matters involving their clients," it said.
The regulator will look at whether there are systemic weaknesses in the reporting requirements, especially where fund managers provide instructions to custodians to direct payments to third-party accounts.
"ASIC will consider how to ensure that custodians fulfil a genuine gatekeeper function," it said.
"ASIC will consider whether further obligations are necessary, in addition to those in the anti-money laundering regime, and will liaise with the government as to our findings."
Gray did not oppose the review, but said the debate should take place in an informed manner.
"Where I get a little frustrated is that there was another submission made on Trio Capital by a fund manager who was saying: 'How can the custodian possibly let this investment occur?'" he said.
"Well, custodians can't stop investments from occurring.
"Custodians have an obligation to act upon an instruction that comes from their clients to settle a transaction.
"It is not up to the custodian to say whether it is a good investment or not a good investment. That is what responsible entities do and what fund managers do."
