Broaden view on custody

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Increasing regulation of investment clients’ custody arrangements should not just be for DIMS providers, industry participants say.

Wednesday, July 31st 2013, 6:09AM 1 Comment

by Susan Edmunds

The FMA released a DIMS consultation paper on Friday.

DIMS are investment arrangements where a person is authorised to make buy and sell decisions for their client without referring back to them for every transaction.

There will be significant changes to DIMS when the Financial Markets Conduct Bill (FMCB) comes into force, probably next year.

But one of the aspects of the consultation paper is custody arrangements, such as where an AFA appoints a wrap provider to hold a client’s portfolio.

Under the FMCB, AFAs who offer DIMS to retail clients will usually be required to use an independent custodian.

Both the wrap platform and the AFA involved in offering DIMS must be registered as a broker.

They will be expected to enter into a custody agreement with clients that details whether clients’ money will be in a separate account for each client, whether the handling of money is outsourced and what fees will be charged.  They must have systems in place to at least daily record each portfolio’s holdings, and regularly reconcile records with those of external providers.  IT systems must be robust. Advisers may need to have their systems independently audited.

Red Owl Consulting director Rob Dowler said the FMA should look at custody arrangements in general, not just in relation to DIMS. “The issue is more about custody generally. There are more assets held in custody that are not related to DIMS.”

Any structure that was applied to DIMS custody should apply across the board, he said. “What are the risks that apply to DIMS that don’t apply generally?”

The FMA is holding a series of workshops about the consultation paper and he said it was an issue that would be raised with them then.

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