[ I N S I D E V I E W | J O N A T H A N W A T K I N S ] globalcustodian. com
Won’ t somebody think of the custodians …
can picture the sarcastic introduction of a tiny violin being played by anyone I ask to
I feel sorry for a custodian bank. An imaginary tune being played with thumb and index finger upon highlighting the hardships facing organisations sitting on trillions of dollars of assets. But custodians are an essential part of the financial ecosystem and need to be protected accordingly. To keep upping the pressure through regulations, scrutiny of business models and calls for lower fees could result in the adverse effect of forcing more players out of the market. Especially given that competition is one of regulators’ biggest concerns. In the first half of 2017 we’ ve seen a series of additional headwinds, combining with the decade-long hurricane of regulatory changes squeezing profits and forcing an entire rethink of business models. These new business models are now subsequently being scrutinised by regulators, completing the final arc of the vicious circle. There was genuine frustration in the voices of industry veterans as we discussed the UK’ s Financial Conduct Authority’ s( FCA) sudden interest in custodians.
Suddenly the watchdog has pointed out the bundling of custody services as a‘ competition issue’. But the evolution of this range of services was down to the low profit margins of custody as a single service, stemming from regulatory changes in the first instance. The old model of custody simply isn’ t an option anymore, and the alternative is to exit the market, which in turn would lower competition. So while the regulators seem to feel the need to make noise about costs and competition, they are at risk of pulling too many blocks out of the Jenga tower. At the same time, our cover feature in this issue explores the world of asset managers and their own fee troubles. Ultimately, asset managers have little choice but to minimise their overheads as they are having to lower the fees they are passing onto their clients. Again, the FCA has intervened here, demanding answers as to why active management fees remain pre-set at what it believes are uncompetitive levels. And it’ s custodians who will feel the strain( p. 22) as asset managers look to save elsewhere. It seems likely that in the near future there will be rules on concentration risk around the safeguarding of assets, which could see the biggest asset managers look to split their custody services. This would be similar to BlackRock’ s recent move of $ 1 trillion of assets under management from State Street to JP Morgan for custody and fund services, while leaving its ETFs business with the former. There could also be further transparency rules and pressure on updating technology systems. Both regulators and clients could end up demanding that custodians keep up with the fast-moving world of disruptive technology. Unfortunately, the tangled web of legacy systems continues to hold back any major developments. While this is a crucial priority for securities services firms at present, it represents yet another pressure and huge cost centre on top of an ever-growing list.
Jonathan Watkins Managing Editor Global Custodian
EDITORIAL
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Global Custodian( ISSN 1047-8736) is an Strategic Insight publication. © Strategic Insight 2017
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6 Global Custodian Summer 2017