If the consolidation of the corporate superannuation arena had been the primary driver for change among the major custodians, then the advent of choice of fund is being seen as likely to accelerate the pace of that change.
That is the assessment of a majority of custody market experts.
Yet according to Wendy Leong, Senior Product and Strategy manager at BNP Paribas Securities Services, now is the time for custodians to exercise caution in their approach to the super industry.
“With consolidation occurring in the superannuation and funds management sector, there is a lot of activity within the custody marketplace. Custodians have a need to be careful of their focus as, for many, there is a very real danger that they will be out of a job should a current client merge with another fund,” she says.
The fear for custodians that Leong describes is that a smaller boutique fund, and client, is acquired by a master trust or larger fund. Dealings by the custodian with previous management are no longer current and chances are new management has an arrangement with another custodian or something altogether different in mind.
The manager of sales and marketing at National Custodian Services (NCS), David Coia, acknowledges the consolidation which has been occurring but says NCS has been able to maintain its position.
He says it is a question of scale and that very often NCS may appear to lose a fund when it folds into a master trust, only to find that NCS is actually the custodian for the master trust as well.
David Travers, managing director Investor Services at State Street, sees the evolution of the custody market similarly. However, the history of State Street means that Travers has a unique perspective on the changes occurring.
“State Street made a choice back in 1999 not to take on super funds as custody clients. However, changes brought to the industry by both consolidation and choice of fund have been forcing us to look seriously at the super industry once again,” said Travers.
In terms of how the custody market is evolving within Australia, a consensus seems to be difficult to find. Leong of BNP Paribas states that consolidation has been occurring within the custody industry to parallel that within the superannuation industry.
“I have been consulting in this area since the early 1990s. I remember the entry of big custody players from abroad into Australia. However, the movement since then has been all one way, as almost all of those players have disappeared. They realised that there simply wasn’t enough profit within Australia to sustain so big a market.”
According to Leong, JPMorgan, National Custodian Services and BNP Paribas are the major players catering to the big master trusts. But she stresses that the number of opportunities within the marketplace are reducing and the race for profitability is becoming more intense.
On the other hand, Angelo Calvitto, director Relationships and Sales at ANZ Custodian Services, has seen no evidence of consolidation, at least not at present. Looking to the future, however, Calvitto sees technology as being a key factor.
“Technology will always be a priority for custodians. The reality is that it may drive consolidation in the future. At some point technology will decide who will stay in the sector, and who will exit,” he says.
Leong agrees, stating that technology, though unfailingly expensive to both buy and implement, has to be a focus for custodians.
“Many overseas custody networks, though effective in their country of origin, aren’t always suitable for the Australian market. The system needs to be shaped and tailored to work within Australia and this requires significant investment capital.”
What custody experts do agree on is that the influence of both superannuation fund consolidation and the upcoming choice of fund legislation is neither earth shaking nor expansive. Calvitto and Leong both state that what movement is occurring is happening on a small scale within the custodians’ current client base.
From the superannuation side of things, Leong says that many funds are looking to whether they need to change their current custody arrangements.
“Many industry funds are simply looking to review their current arrangements. For some, this is a product of choice and for others, it is simply that they have not reviewed how things are set up with their custodians for a number of years now.”
Even questions raised by due diligence have forced corporates to review the way in which they interact with their custodian, according to Leong.
“Increased focus on governance is a key factor triggering changes within the custody industry. Management have a need to be more aware of what their outsourcing arrangements are,” she says.
“Basically,” says Leong, “there is a lot of tender activity out there at the moment, though not necessarily on an official basis.”
