[ N E W S
gests you are charging unfairly, not being
transparent.
“I don’t think banks discount that, but
the margins are so thin that banks have to
make money on other services.”
Competition and technology being
mentioned in the same list of priorities
raises another interesting point. With the
expenditure on new technology and low
margins, it’s almost impossible to enter
the market right now anyway.
Will the FCA bite?
Capital requirements through Basel III
are also putting the industry under even
more pressure for large banks, which
increases risk. Even for the growing in-
dustry of securities lending, more capital
is needed.
The reason these bundled services have
arisen is so that custodians can keep
their heads above water and provide a
market-necessity in safeguarding and
servicing assets.
A N A LY S I S
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F C A
TA C K L E S
C U S T O D Y ]
“Many suppliers could lose money, and I doubt they could
recover it from clients.
JOHN GUBERT, FORMER HEAD OF HSBC SECURITIES SERVICES
“The lack of custody as a core service
is allegedly driving the need for banks to
offer additional services such as FX trad-
ing and securities lending in a bid to boost
revenue,” said the FCA.
“Low profit margins also deter custody
banks from investing in modern technolo-
gy systems. We remain concerned that the
failure to upgrade existing systems could
negatively affect the sector.
“The reliance on out-of-date systems
could create an additional barrier, pre-
venting asset managers from switching to
other providers.”
Having come under the spotlight in 2013
without much consequence, custodians
may wonder what will happen this time.
While custody was addressed only five
times in the business plan four years ago,
now it takes up around five pages – and
even has its own bold pull-quote – in the
statement.
The FCA has shown its not afraid to
tackle the custody giants, dishing out pen-
alties to BNY Mellon in 2015 for failing to
comply with its Client Assets Sourcebook,
and to State Street in 2014 for overcharg-
ing its transition management clients.
Given the regulators stance on compe-
tition, transparency and the urgency in
the business plan, a deep look into the
industry could occur, with potential rules
on competition – and perhaps concentra-
tion risk – on its way.
The FCA’s concerns
“We are concerned about contractual terms between
custody banks and investment managers and there is
evidence that terms are more beneficial for the banks.” question, as it prevents investment managers from
being able to shop around to obtain more competitive
offers.”
“There is a small number of custody banks providing
services in the market, but we do see evidence that firms
compete on price for core custody services.” “Contracts are usually around 10 years in duration,
creating barriers to switching providers.” “Low profit margins also deter custody banks from
investing in modern technology systems. We remain
concerned that the failure to upgrade existing systems
could negatively affect the sector, given the concentrated
nature of suppliers and the reliance placed on custody
banks by investment managers.”
“Because of low profit margins, many custody banks
do not offer core custody as a single service. Instead, in-
vestment managers need to sign up for ancillary services
such as FX trading and securities lending. There is some
evidence that custody banks will charge low fees for core
services. Additional revenue generation will be sought
from ancillary services.” “The reliance on out-of-date systems could create
an additional barrier, preventing asset managers from
switching to other providers. Considering these switch-
ing barriers, the low number of suppliers and the lack
of investment in new technologies, the prudential and
operational risks associated with a significant service
outage within the sector are high.”
“The bundling of custody banking services with other
administration services raises an important competition Sources: FCA Business Plan 2017/18, FCA Sector Views
2017
Summer 2017
globalcustodian.com
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