ASIC has published Report 531, titled ‘Review of compliance with asset holding requirements’, after conducting a review of custodians and responsible entities of managed investment schemes in late 2016 and early 2017.
The review found that compliance with Regulatory Guide 133 ‘Managed investments and custodial or depository services: Holding assets’, which was released in 2013, “fell short of expectations” and that industry participants had a “generally poor level of understanding of the relevant requirements”.
Specifically, ASIC found that some entities had inadequate compliance resources and that a majority of the sector relied on manual processes.
While 80 per cent of the industry outsources custody to external providers, the remaining ‘self-custody’ entities displayed a lack of understanding of conflicts of interest that exist because of dual in-house and responsible entity and custody functions.
“These conflicts were therefore not managed. For example, one entity had the same directors and signatories on the board of the responsible entity and the custodian subsidiary,” said Report 531.
“In addition, one entity did not have a conflicts of interest policy governing its relationship between it and its related party custodian.”
All licensees complied with their net tangible assets requirements, said ASIC.
ASIC commissioner John Price said, “Responsible entities and custodians play a crucial role in ensuring the overall health of our financial system. Their conduct influences levels of investor trust and confidence.
“The custody, or safekeeping, of assets is a critical function. Without appropriate safeguards by the asset holder, either a responsible entity or a custodian, there is a potential threat to investors’ assets.
“Adequate resources and an appropriate risk management framework are therefore necessary for asset holders, to ensure that their safekeeping and related functions are properly performed.”
