RBC’s exit causes ongoing ripples in the Australian custody market

It is a measure of the impact of the COVID-19 pandemic that at least four superannuation fund custody mandates which were on foot in February are now, largely in abeyance as the industry seeks to deal with more pressing issues, not least the Government measure allowing hardship early access to superannuation.

Custody, more so than even administration and asset allocation, continues to be the big task outsourced by superannuation funds simply because it represents such a complex area which necessarily needs the underpinning of the sort of highly specialist technology which can only be delivered by the major banks.

Little wonder, then, that when a number of superannuation funds late last year decided to review their custody needs and to test the market, they would have been aware that one way or another they would end up with a choice of around five global institutions, and one locally domiciled major player.

In Australia, the top 10 players are:

• JP Morgan;
• NAB Asset Servicing;
• Northern Trust;
• Citigroup;
• State Street;
• BNP Paribas;
• HSBC Bank;
• RBC Investor and Treasury Services;
• Ausmaq; and
• Netwealth.

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However, of these players, only the top seven are usually regarded as being in contention for superannuation fund mandates, and it is worth mentioning that one of those major players – RBC Investor and Treasury Services – decided last December to exit the Australian market.

What is more, as part of that exit, RBC gave its imprimatur to Citigroup to pursue onboarding RBC’s major Australian clients – something which is regarded as being at least in part responsible for some of the custody mandates currently on foot in the market.

Australian staff of RBC were told that the company had decided to close is Australian custody business and the messaging around the move was that “the complex and dynamic nature of the market in Australia meant it was difficult for us to grow the business to the size and scale required to deliver meaningful value for our shareholders and clients”.

“We consider that it is in the long-term interest of our clients and employees to seek a transfer of our business to an organisation with a client focus and strong offering in the market. We thank our colleagues and clients for their partnership and remain committed to supporting each of them during this period of transition,” it said.

RBC is not the first nor is it likely to be the last global custody business to decide to exit Australian custody notwithstanding the scale of Australia’s $3 trillion superannuation industry and its still-growing funds management industry.

Over the past 20 years, BNY Mellon has ventured into and then largely departed the domestic custody market and it was not that long ago that NAB Asset Servicing was actively canvassing exiting the market with the decision to remain understood to have been largely influenced by the dearth of companies willing to buy the business for the price hoped for by NAB.

Indeed, after deciding to remain in the custody market in 2015, NAB Asset Servicing also chose to end its long-standing global custodian partnership with BNY Mellon and switch to Citibank.

At the time, NAB was citing the benefits of Citi’s extensive global network and technology.

And the ability to leverage global technology remains a key selling point as custodians seek to compete for Australian superannuation mandates.

Looking at the changes which were occurring to the Australian custody market, BNP Paribas Securities Services Australia chief executive, David Braga, said that he had done some analysis and it was interesting to see how, over the past 25 years, players and entered and left the Australian market.

“Its been pretty stable for a while now but we need to remember that it’s a very competitive market, it’s a complex market and the clients and buyers – the superannuation funds, asset managers, and broker/dealers and the like – are very sophisticated organisations, they understand what they want extremely well so it makes it a very competitive environment,” he said.

“That strong competition is a good thing because we all want to keep our clients and look after them properly, so for an organisation like RBC to decide they’re going to change their posture in Australia – that sort of thing is going to happen from time to time with the underlying dynamic being that we’re operating in a very strong market, a very large market and a very competitive market,” Braga said.

He said that from BNP Paribas’ point of view, the company remained very committed to the Australian market.

“We like being here [Australia] we think it is a very positive place for us both on a local basis and on a global basis in terms of the types of services and the questions we get asked of us here,” Braga said.

“We can often find ourselves solving problems for clients in Australia and then developing new global capabilities and we’ve got a few examples of that around some reporting for one of our superannuation fund clients which is now being used as a prototype for our global capabilities,” he said.

“There’s also another project we’re working on around the provision of data for a major complex asset owner and, again, that is something that we’ve done in Australia first leading to it becoming a new global capability,” Braga said.

JP Morgan’s head of platform sales, Nick Paparo, echoed many of Braga’s sentiments including the need for custodians to, as far as possible, maintain a business as usual (BAU) approach in the current circumstances of the COVID-19 pandemic.

“Fundamentally maintaining the BAU service – that has been the priority and at the forefront of our minds and we’ve been able to maintain that level of service which is extremely important.

And, like BNP’s Braga, Paparo and JP Morgan have been conscious on the events which have impacted the custody market over the past 18 months.

“It has definitely evolved over the last 18 months,” he said.

“Obviously we’re extremely proud of our leading position in the Australian market and as a global custodian we just recently hit number two as well, but ultimately what we’re seeing from our clients is how can JP Morgan leverage its scale but also its investment in technology not just on a business as usual basis but as clients change direction.”

“You would have seen the first step of that with superannuation clients insourcing investment and leveraging their service partners to be able to provide not just the traditional custody and fund services but the middle office service to the superannuation fund,” Paparo said

“And that’s actually accelerated and expanded quite quickly to the point where it’s not just how we support them in the local market but as they expand into different jurisdictions – its how JP Morgan supports them as they move into different markets.”

Paparo said the other major factor was the provision of data.

“The data back-bone that we’ve created is integral to delivering the services and data to our clients to perform the roles they need to not just as traditional asset owners and managers,” he said.

That’s been extremely important and that’s the direction the market has taken in the last 18 months.

A recent white paper produced by the Australian Custodial Services Association (ACSA) has painted a highly accurate picture of the current state of the custody market.

The white paper said the clients of ACSA members generally comprised:

• The trustee (RSE) of large superannuation funds;
• The trustees or responsible entities of managed investment schemes;
• Operators of investor directed portfolio services (IDPS) or managed accounts (SMA, MDA);
• Life and general insurance companies;
• The trustees of endowments and charitable funds;
• Australian governments (Commonwealth and State) and agencies;
• Overseas governments and sovereign funds;
• Global custodians, banks and brokers with a need for sub-custody arrangements in Australia (supporting in-bound institutional investment);
• Listed trusts and other closed ended investments;
• Some of the larger Australian charitable foundations;
• Overseas pension funds; and
• Other overseas institutions (investment banks, broker/dealers, endowment funds, charitable foundations).

“Technically (and contractually), the “client” is the company that acts as the fiduciary of the fund (for example, trustee of a regulated superannuation fund, or the responsible entity of the regulated managed fund),” the paper said.

“The following table provides a view of the Australian market from the Australian Bureau of Statistics (ABS). Note that the ABS also measures retail unit trusts on a consolidated basis which shows a total of approximately $957 billion in this sector, the difference largely due to unlisted trusts accessed directly, not via superannuation funds.”

WHO IS TOP DOG IN THE CUSTODY SPACE

So who is leading the league table among Australia’s custodians?

As has been the case for most of the past five years, JP Morgan continues to be the dominant player in the custody space.