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26 Jul 13
ASICís new financial requirements for responsible entities, IDPS operators and custodians

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The Australian Securities & Investments Commission (ASIC) has recently released:

  • new financial requirements for Australian financial services licensees authorised to operate an IDPS (IDPS Operator) or provide a custodial or depository service (Custodian), and
  • updated financial requirements for responsible entities (RE).

These financial requirements are contained in Class Orders 13/760 and 13/761 and are the finalisation of proposals foreshadowed by ASIC in Consultation Paper 194.

Corporate Advisory Partner, Tim Wiedman, summarises the impact of these new financial requirements.

Responsible entities

ASIC’s revised financial requirements will apply from 1 July 2014 to REs operating prior to 1 July 2013, unless the RE elects to opt-in prior to then. REs who become authorised to operate registered schemes after 1 July 2013, either by obtaining an Australian Financial Services Licence (AFSL), or varying an existing AFSL, must comply with the new financial requirements at that time.

A summary of the impact from 1 July 2014 for REs in operation prior to 1 July 2013 is set out below.

Click to view the RE summary table.

For detailed information on the concepts of average RE revenue, average value of scheme property, cash and cash equivalents, and, liquid assets, please click here.

The key impacts of the revised financial requirements are for REs who:

  • ‘self-custody’ scheme assets (where those assets are not special custody or tier $500,000 class assets), as their minimum NTA requirement increases from $5 million to $10 million, and
  • appoint a custodian (other than an eligible custodian) to hold scheme assets (other than tier $500,000 assets and special custody assets), as they must ensure the custodian meets more onerous requirements, including, from 1 July 2014, a minimum NTA requirement of $10 million.

IDPS Operators

ASIC has extended the financial requirements which apply to REs to cover IDPS Operators.  For existing IDPS Operators, being licensees authorised to operate an IDPS prior to 1 July 2013; they must comply with these financial requirements from 1 July 2014.  For licensees who become authorised to operate an IDPS on or after 1 July 2013, the financial requirements must be complied with upon becoming an IDPS Operator.

ASIC has updated some of the key concepts underlying the financial requirements to reflect that an IDPS Operator operates an IDPS (in contrast to an RE who operates a registered scheme).  

For example, IDPS Operators are subject to a 0.5% calculation for NTA purposes, which is based on the average value of the IDPS property of the IDPSs operated by the IDPS Operator, and, a 10% revenue calculation based on the average IDPS revenue of the IDPS Operator.

Custodial or depository service providers

AFSL holders authorised to provide a custodial or depository service (Custodian) will also be subject to NTA, cash and cash equivalent and liquidity requirements, as well as expanded cash needs and audit requirements.  

The financial requirements will apply from 1 July 2014 for licensees authorised to provide custodial or depository services prior to 1 July 2013, and, for licensees who become authorised to provide custodial or depository services from 1 July 2013, from that date.  

Differing NTA, cash and cash equivalent, and, liquid asset financial requirements apply depending on whether the Custodian is a ‘proper’ Custodian, an incidental provider or an ‘exempt’ Custodian as summarised below.

Click to view the financial requirements table.

A Custodian will be an incidental provider if: 
  • it does not provide any custodial or depository services other than services provided to a client because of, or in order to obtain, the provision of other financial services by the Custodian or its related body corporate and which do not form part of an IDPS, and
  • revenue from providing custodial or depository services is less than 10% of its financial services business revenue.

A Custodian will be an ‘exempt’ Custodian if it is an incidental provider and all financial products to which the custodian or depository services provided by the Custodian relate are held by:

  • a ‘proper’ Custodian
  • a sub-custodian appointed by a ‘proper’ Custodian, or
  • an eligible custodian. 

In addition to the financial requirements summarised above, a Custodian appointed by a licensee (such as an RE) to provide a custodial service, must:

  • if requested, provide the licensee with a statement regarding its compliance with the applicable financial requirements and stating whether it is an incidental provider, and
  • if it lodges a significant breach notification with ASIC relating to a breach of its financial requirements, immediately notify the licensee of such notification.
Application to wholesale fund managers

Generally, the incidental provider characterisation should apply to licensees who operate wholesale unregistered managed investment schemes, and, hold an AFSL authorising the provision of a custodial or depository services which enables them to hold the assets of the schemes on behalf of investors. Wholesale fund managers who comply with the conditions of an incidental provider will either:

  • be required at all times to hold NTA of at least the greater of $150,000 or 10% of their average revenue and meet the cash, cash equivalents and liquid asset requirements set out in the table above, if they hold the assets of the wholesale funds they operate, or
  • have no NTA, cash and cash equivalent or liquid asset requirements, if they appoint a ‘proper’ Custodian to hold the assets of the wholesale funds they operate.

Wholesale fund managers (who hold an AFSL authorising the provision of a custodial or depository services) will also be subject to the expanded cash needs, and, audit requirements summarised in the table above. 

Wholesale fund managers who hold an AFSL which does not authorise them to provide custodial or depository services are not required to comply with the new financial requirements.

For wholesale fund managers who are also REs, by complying with the financial requirements applying to them as an RE, they will also meet the financial requirements of a Custodian (assuming they are an incidental provider).

If you are an RE, IDPS Operator or Custodian who require assistance with understanding how these new financial requirements will apply to you please contact our team.

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

 

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