In custody, bread ‘n’ butter rules

Stronger Super may be dominating the focus of Australia’s major custodians but, as Damon Taylor writes, that has not entirely stopped them looking for ways to innovative and differentiate.

As an industry in the midst of reform implementation, one could forgive Australia’s superannuation industry for being somewhat distracted. By all accounts, fund resourcing is being stretched to breaking point and yet the business of facilitating Australians’ retirement savings continues. 

Assets must be held safely, investments must be made, transactions continue to flow. For David Braga, managing director of JP Morgan Worldwide Securities Services, these are services which, irrespective of regulatory reform, remain front of mind for custodians  

“Obviously, everyone is still quite heavily engaged around the reform agenda and frankly likely to be for a while yet,” he said. 

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“If you look at Stronger Super, a lot of the impact on custodians, particularly around data, was deferred until 2014 at the request of the industry, so we’ll all still be dealing with this for at least another year or so. 

“And in fairness, yes, that does mean that we’ve got people working on it, but it’s not our sole focus and not the only thing that we’re working on,” continued Braga.

“So we’ve done a lot of investment into the local business over the last year or so but, in addition to that work, we’re also working as ever to support our clients. 

“We’re seeking to help and support them in whatever it is they’re doing to look after their membership.” 

Describing a similar challenge, Christine Bartlett, executive general manager for NAB Asset Servicing, said that even for custodians, the ramifications of Stronger Super were significant. 

“The whole Stronger Super regulatory reform is top of mind at the moment, in terms of being ready to support our customers in the second half of the year when they have to start reporting to APRA [the Australian Prudential Regulation Authority],” she said.

“So that is absolutely top of mind at the moment, but that aside, I think the other thing that we continue to work on is our approach around best of breed. 

“At NAB we’ve got a very strong domestic business and that comes with all the benefits of being very familiar with our regulators, with our tax and accounting and so on, but then we also try to leverage other third parties that are going to bring value to our clients,” Bartlett continued.

“So Bank of New York Mellon has always been the foundation for us, but we’ve expanded that now to Deutsche Bank for transitions, GBST around tax, MMC which is an organisation that we’re working with in New Zealand, and so on. 

“So we’re building out that capability through partnering.” 

Of course even in the midst of regulatory reform, the nature of custody is such that there is always movement in the marketplace according to new tenders and mandates, and for Pierre Jond, managing director for BNP Paribas Securities Services Australia and New Zealand, that reality invariably dictates custodian spend and focus. 

“There are probably three topics that we’ve been talking closely with superannuation funds about, and that’s both existing clients as well as future prospects,” he said.

“The first one is the trend towards superannuation funds setting themselves up as investment managers or at least developing some sort of investment management capability. 

“So we’ve implemented a product called Dealing Services whereby funds are able to outsource the execution of investment decisions,” Jond explained.

“I’ll give you an example; a superannuation fund might setup an investment capability for international fixed income portfolios and work with two or three chosen brokers with which they’ve done research, had good execution and so on. 

“We’re then able to execute all of those investment decisions with the appointed brokers of the client.” 

Jond said that BNP Paribas’ second major point of engagement with clients was around the administration of unlisted assets such as private equity, but he added that the topic that continued to be most prevalent in the super industry was that of risk management. 

“Anything to do with measuring performance and understanding the risk linked with portfolios; it’s all front of mind for clients,” he said.

“And clients have always been interested in these reports, but they now want it to be literally at their fingertips, on an iPad or similar device. 

“It’s always a topic of conversation with clients these days, and I think it’s one that’s here to stay.” 

Indeed for William Fraser, head of eSolutions for JP Morgan, it is that desire for more immediate information than means super fund executives’ far broader demands lie firmly in the realm of technology. 

“So my role is looking after all the client-facing technology components at JP Morgan. Our technology spend over last year and this year has been in excess of $40 million,” he said. 

“It’s targeting how we bring solutions quickly to market that capitalise on breadth and depth of data, because David (Braga) will come to me from a product point of view and say, ‘we have to be able to support these front office asset management capabilities.’ 

“And it’s no small task but I’m pleased to say that our investment last year, which was bringing out standard data products right across the asset universe for those clients, was strong and that we’re leveraging those data capabilities to enable our clients to do exactly that.” 

Yet as important as new features and new services are within custody, Bartlett was quick to point out that it was worth little if a custodian wasn’t getting the basics right as well. 

“With this kind of capability, if you’re not getting basics right and being able to provide a quality service with minimal errors, then the service ultimately fails,” she said. 

“As custodians, we have to provide funds with a service that is both dependable and reliable and I think unless you’re doing that, you simply don’t get the opportunity to talk about anything else. 

“So from my perspective, providing that sort of safety and security, particularly to trustees, that still continues to be priority number one.” 

Not surprisingly, Braga said that he could not help but agree. 

“Yes, I think the basics are always key to clients when they go through that sort of review process,” he said.

“The market for providing custody and administration services is competitive and that means that clients are always looking at the next three, five, seven-year horizon and saying ‘who do I think’s going to be the right partner to work with’ for where they’re going as a fund. 

“So yes, there are always the normal questions about range of service, types of assets that can be supported, the technology interfaces, inevitably also the cost of the services – it all goes into the mix,” Braga continued. 

“But my reflection would be that while it all sounds good when you’re going through a tender process, the real question is whether the partner you’re looking at has the evidence and the track record to be able to deliver those services in the way that you’re expecting. 

“So the challenge for funds is getting past the sales cycle into the reality of actually running your fund for your members and ensuring that you’ve got a partner who’s got the right evidence of being able to provide the support that you need.” 

Of course beyond their day-to-day duties in servicing the superannuation industry, the topic of note these last several months has been the Australian Securities and Investment Commission’s (ASIC’s) examination of the gatekeeper role that it suggests all custodians must play. 

And for Jond, speaking in his capacity as chair of the Australian Custodial Services Association (ACSA), the resultant discussions have been entirely positive.  

“Without going into any sort of granular analysis, ASIC has the truly legitimate view that if something is being picked up in the industry, it should be communicated back to them,” he said.

“And that’s the case irrespective of the channel, whether it’s through the responsible entity, through the custodian, or through the investment manager.  

“So as I say, that’s a legitimate and understandable view and at ACSA we are totally supportive of having that kind of reporting responsibility, that whistle-blowing requirement.” 

However, according to Jond, the issue becomes far more complex when it comes to scoping requirements. 

“The complexity is around the level of scrutiny,” he said. “Where is the benchmark? What do we actually need to do to be able to have certainty that we’re doing the right job, that we’re doing the right thing? 

“We’ve had some very close discussions with ASIC [the Australian Securities and Investments Commission], with ASIC understanding where we’re coming from, with custodians understanding what ASIC actually wants to achieve. I think that the consultation process throughout all of this has been really top notch,” Jond continued. 

“So towards the end of June, we’re going to have the release of RG133, the new legislative backbone of the custody business, and I’m confident that we’re not going to be in a situation where custodians are being asked to carry out the role of the RE (responsible  entity), because that was one of our major concerns. 

“But again, I think ASIC has done a fantastic job in its consultation process with the industry and I’m very confident that we’re getting to a point where we will have something that, at the end of the day, improves the protection of investors in Australia, because that’s what we’re paid for and that’s what we are all striving for.” 

Holding a similar view, Braga said that the most pleasing aspect of discussions had been the shared objective of ensuring trust in the system. 

“The other thing that we’ve been able to get to agreement on is that there are multiple gatekeepers through the whole value chain, and that it’s important that each one of them is fulfilling their role really well,” he said. 

“In particular, the differentiation between custodians and an RSE (registrable superannuation entity) or a trustee has been upheld in the discussions with ASIC. 

“There was a point where we were a little bit concerned about whether they were merging or mixing some of the potential obligations, but it now looks like that was unintended and that ASIC is very firm on each role being played properly on behalf of the underlying investors and members,” Braga explained. 

“So all of that means that we’re still bottoming out some of the specifics with them but the direction they’re heading in makes a lot of sense and will result in improved clarity over how a custodian performs its role. 

“It will undoubtedly be helpful across the whole industry, to have that improved level of understanding.” 

Yet looking beyond the industry’s present concerns around legislative change or what appears to be an affirmation of existing roles, custodians must also keep one eye to the future.

But whether it’s industry funds’ desire to compete with self-managed super funds by providing direct investment or developing new concepts by leveraging ‘big data,’ Jond said that catering to new customer requirements was a custodian’s bread and butter. 

“We live in a world of constant change and constant new trends,” he said.

“So being able to support new investment strategies, being able to support new products is again part of our DNA. 

“From the custodians’ standpoint, we are really supporting the innovation process coming from our clients,” Jond continued. 

“Things like member options or direct investments do require a level of adaptation, a level of evolution of the service proposition, but it’s also not absolutely radical in terms of the whole custody strategy or the custody operating model. 

“It does require some adjustment, however: having flexible IT platforms is the name of game in the custody world; being able to cater for new products, new services is always our daily challenge and it’s a challenge I believe we are meeting.” 

Commenting on the idea of ‘big data’ specifically and pointing it out as a space to watch in the future, Fraser compared the trend to the retail explosion of the iPhone and the proliferation of smart devices. 

“All of a sudden what was happening was this mass proliferation of data that was starting to explode because people were using more online tools, investigating their retail bank account or even transacting,” he said. “So we’ve seen a thousand-fold increase in what is basically click data. 

“Now, that’s a very general statement, but in the super industry a lot of funds are realising that mobile technologies, websites and the capability to interact with their members is actually a key differentiator for them,” Fraser continued. 

“In this age of choice, they’re needing to understand their members better, they’re also needing to communicate with their members in a more effective way. 

“So if you then extrapolate that across their whole ecosystem, you’ve got service providers such as custodians, you’ve got their mobile and web presence, you’ve got regulators, you’ve got other tax providers – and they’re all needing to understand all of the data that’s flowing around in what are effectively virtual ecosystems.” 

But Fraser points out that big data is very different from the industry’s older data-mining concepts. 

“Big data is trying to say that there’s a lot of data that’s being captured, there’s a lot of data that’s sitting in that ecosystem, and it’s using technology to understand what it means for the funds and their members,” he said. 

“That’s the essence of it – but it’s not just the old data-mining concept, because it’s a thousand-fold increase of this data so it’s actually being able to harness that. 

“An example of a small sliver of it has been a number of funds that have started to analyse member movements and interactions within their ecosystem to see whether they can predict when they may move out of the standard industry fund to a self-managed structure,” Fraser elaborated. 

“So they’re starting to be able to harness that kind of information to basically defend their territory against this leakage to a different sector. 

“And these are all things that will continue to evolve over a period of time by using big data.” 

Looking to the future and developments in custody that were not related to technology, Jond said that the evolution taking place within the Australian superannuation industry would be interesting to watch. 

“I suspect that as the industry grows, there is going to be somewhere a limit to what the local stock exchange or the ASX is able to actually absorb,” he said.

“Otherwise, you’re going to get into a situation where market valuations locally will be artificially inflated. 

“So I suspect that the growth of investments offshore is going to be quite significant going forward,” Jond continued. 

“And that means that anything a custodian can provide in terms of supporting growth internationally – making sure that your clients understand exactly what are the pitfalls, what are the risks involved, not from an investment perspective but from a pure nuts and bolts, safekeeping-of-assets perspective – that’s going to be invaluable.” 

Offering a slightly different perspective, Braga said that JP Morgan’s focus would simply be reducing the administrative burden for clients. 

“So we’ll be focusing on how we make our information, our part of their virtual ecosystem, available to them in a way that makes it easier for them to be able to run their fund and reduce their administrative burden,” he said. 

“That future agenda is looking at providing a more holistic, integrated service, using the width of capability we’ve got to say how we can continue to reduce the administrative and investment burden for our clients in a way that helps them achieve a better outcome and reduce the total cost of operation for their fund. 

“We’re trying to offer a better value proposition, not just for the fund but for the end member as well.”