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Custodians a risk as only unlicensed link in investment chain, NZ law overhaul submissions say

Friday 14th October 2011

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The decision not to license custodians has attracted some ire among the raft of submissions on the proposed overhaul of the nation’s securities law.

Among the 72 submissions on the Financial Markets Conduct Bill, company supervisor Trustees Executors, lobby group Trustee Corporations Association, law firm Buddle Findlay, state-owned lender Kiwibank and the Public Trust all recommended that custodians, the institutions which hold assets and securities on investors’ behalf, be licensed by the regulator under the new securities law regime.

Trustees Executors says the exclusion is a “significant omission” and leaves custodians as the only link in the investment chain that isn’t required to be licensed, with investment scheme managers, trustees, providers of discretionary investment management services (DIMS), and derivatives issuers all coming under the regulator’s watch.

“It is necessary that all custodians should be licensed to avoid a form of regulatory arbitrage,” Trustees Executors regional manager Clynton Hardy said in his submission. “A consequence of imposing licensing requirements on specific sectors of the finance industry, but not all sectors, could result in financial services being pushed into the least regulated area of the market in order to circumvent regulatory controls.”

The submission warns the hole leaves open the possibility for another collapse like Access Brokerage’s in 2004, whose boss Peter Marshall defrauded investors and was sentenced to three years in jail in 2008, and “leaves investors at serious risk in the event of a default.”

Though trustees and DIMS managers are responsible for custodians under the proposed legislation, the exclusion “puts New Zealand out of step with other jurisdictions including Australia,” the submission said.

Kiwibank said the licensing of custodians would bring them in line with managers and supervisors, while Buddle Findlay queried the exclusion, saying “this seems to be one of the few major areas where a person can play a significant role in investment and investor monies without a licence.”

The Trustee Corporations Association said the exclusion of custodians from the licensing regime “increases investor risk,” and pressed for fund managers to be captured by regulation as well.


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