More than five years after the International Monetary Fund (IMF) pushed for a custody-licensing regime in NZ, the issue appears to have sunk even deeper into regulatory back-office obscurity.
But institutional-grade custody providers in NZ continue to favour licensing as a prudent risk-control measure despite the lack of urgency among regulators and policy-makers.
For example, Mark Lawrence, Public Trust head of custody, says the lack of licensing – as identified in the 2017 IMF report – remains a “potential weakness” of the NZ financial system.
“From a Public Trust point-of-view, licensing of custody would be a good thing,” Lawrence said. “It would be interesting to see the effect if licensing is progressed.”
He said requiring all custodial providers to comply with common standards in areas such as auditing and capital reserves would be a “big plus” for NZ markets.
The Financial Markets Authority (FMA) did give a nod to some of the IMF concerns in a 2019 ‘thematic review’ of NZ custody arrangements but essentially left the sector as is.
“… we will consider any remaining policy questions and, in the longer term, whether there is a case to seek a requirement for licensing of custodians,” the FMA review says.
Post the publication of the IMF report, NZ has seen a couple of custody-related incidents, most notably the failure of the trans-Tasman stock-broking firm Halifax in 2018, triggering regulatory action and a slew of lawsuits that have yet to be fully resolved.
Halifax NZ liquidator, Ferrier Hodgson, said at the time that:
“The reason for this co-mingling appears to be improper operation of trust accounts and improper application of client monies by Halifax AU.”
Almost exactly reprising the experience of the fraudulent Ross Asset Management scheme in 2012, the collapse of wholesale investment fund, Penrich Capital, last year also highlighted the importance of robust custody for investor protection.
“We have no direct influence on the way wholesale funds implement custodial arrangements,” the FMA 2019 custody review says. “We will consider the extent to which we can indirectly influence practices in that area by clarifying and reinforcing our expectations of MIS [managed investment scheme] managers that invest in these funds, and of their supervisors.”
Poor back-office practices tend to go unnoticed by investors until it is too late but Lawrence said a well-resourced and properly regulated custody sector was essential in avoiding what could be catastrophic damage – both to investor assets and the reputation of the industry.
“Custodians have to continually invest in technology and people,” he said. “And Public Trust is committed to doing that.”
Lawrence joined Public Trust in 2019 following a long stint as country head for JP Morgan (which exited the Australasian regional sub-custody business last year).
He said the business was becoming more complex as clients seek custodial solutions for assets beyond the usual listed markets to include illiquid options such as private equity or exotic items like crypto-currency.
“As a custodian you’d be stupid to ignore crypto – and we are looking into it but it’s at the very early stages,” Lawrence said.
However, he said investors might not all understand the custodial risks involved in holding crypto.
“If you ask five different people about why they think cryptocurrencies are safe you’d probably get five different answers,” Lawrence said.
Regardless of the growing complexities of the investment market, the core custodial duties haven’t changed.
“At the end of the day, a custodian is responsible for holding and reporting on assets and managing transactions,” he said. “It doesn’t really matter what the underlying assets are.”
Public Trust is one of handful of institutions offering custody to NZ clients in an elite group that includes BNP Paribas, MMC, Trustees Executors, MMC and HSBC.