FMA releases findings on managed investment scheme custody review
The Financial Markets Authority (FMA) has published a summary report on a review of custody arrangements in managed investment schemes (MIS). This was a response to questions raised by the International Monetary Fund and its Financial Stability Assessment Programme (FSAP).
The report is relevant to all financial institutions, businesses or individuals dealing with MIS (including KiwiSaver Schemes) or custody arrangements. The FMA’s views in this report are particularly important for supervisors, custodians and MIS managers.
What it covers:
The FMA engaged PricewaterhouseCoopers (PwC) to conduct a thematic review of MIS custody practices, focusing on retail managed funds.
The review discusses the role of the custodian under the Financial Markets Conduct Act (FMCA), the types of custodians, the FSAP recommendations on custody, and the MIS custody landscape.
- A large proportion of managed fund assets are invested in wholesale funds, where custody is not regulated (apart from fair dealing in the FMCA). Supervisors need to ensure they do due diligence on the custodial arrangements of wholesale funds.
- In accordance with the FMCA, most scheme property is held in custody. However, certain assets types are not always (or never) held in custody. This tends to happen with bespoke assets, such as OTC derivatives, call accounts and term deposits.
- Supervisor oversight is not consistent and is insufficient at times. In practice, supervisors often delegate custody administration tasks to specialist custodians or MIS managers. The FMA is concerned that this undermines the separation of functions and duties.
- While ‘annual audit (assurance) engagements’ obtained by custodians were generally positive, there were a variety of audit approaches implemented by schemes which resulted in inconsistencies.
The FMA has stated it will be following up with supervisors and is planning to prepare guidance to clarify its expectations regarding custody practices and oversight. It will also consider policy questions and, in the longer term, whether there is a case for licensing of custodians.
If you have any questions in relation to this review, or funds and custody more generally, please contact one of our experts.
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