Proposed obligations for custodians 'misconceived'
Some of the Australian Securities and Investments Commission's (ASIC's) proposed legal obligations for a custodian are unworkable, according King & Wood Mallesons director Damien Richard.
The so-called 'expectation gap' based on a retail client's understanding of the role of custodian in a managed investment scheme was first highlighted in the Parliamentary Joint Committee's inquiry on the Trio Capital collapse.
At the time, the Australian Custodial Services Association defended the inability of a custodian to protect investors' funds in such a collapse.
In a consultation paper released in December - 'Holding Scheme Property and other assets', ASIC has pushed forward with proposals that custodians be obligated to report to the regulator if they think their clients have failed to report breaches.
"That's problematic because a custodian may well not be in a position to determine whether the client has even reported the breach or what process the client has been through, because it's not a matter for the custodian," Richard said.
He said the custodian "won't have much visibility to that necessarily" and the proposal is "misconceived" for that reason.
Regarding another proposal, Richard said many custodians think it is unreasonable that they be strictly liable for any default of a sub-custodian, considering the prudence exercised by a custodian in selection and ongoing monitoring.
He said it would be an even greater concern to the custodial industry if the responsibility for sub-custodians were to extend beyond retail client relationships - as the consultation paper suggests - and apply in a wholesale context.
"The custody industry is a global industry and assets are held all around the world through sub-custody networks - if ASIC prescribes a requirement that affects the sub-custodians in various global jurisdictions, that can be unworkable," Richard said.
Richard said King &Wood Mallesons is currently preparing a submission on the consultation paper in conjunction with the Financial Services Council on a number of these matters.
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