Updated regulations from the UK-based Financial Services Authority introduced last month have placed greater emphasis on firms under its jurisdiction to carry out a risk assessment of their custodians and to monitor them continually. Regulated companies, which include pension funds, insurance companies and asset managers have until the end of next June to comply the changes.
One of the rules under the FSA’s ‘conduct of business’, stipulates that “before a firm holds a safe custody investment with a custodian or arranges registration of a safe custody investment through a custodian, it must undertake an appropriate risk assessment of that custodian.” The regulations also specify that firms must undertake an appropriate risk assessment of a custodian before recommending it to a private customer. The FSA suggests that firm should also establish the custodian’s credit rating and whether it is regulated and, if so, by whom.
Although many of the recommendations are guidelines opposed to being mandatory, they will come as a boon to companies like Fitch AMR and the London-based companies Thomas Murray and RCP & Partners who have been working on custodian ratings for some time. Many of the requirements already exist, albeit in a looser form. The new regulations are more formal and come under the new financial services and markets act 2000 that came into being on the first of December.
According to Thomas Murray, the new regulations place an increased burden on companies to assess their custodians’ credentials and the quality of their service. “There has been significant consolidation of custodians and therefore more institutions need support tools to assist them ensure that their current custodian meets best market practice and the new regulatory obligation,” says chief executive Simon Thomas.
Thomas Murray has been working on a series of custodian ratings that include a risk assessment that analyses financial, asset safety, asset servicing and operational risk. It says that the ratings examine a custodian’s overall credentials, its basic services, internal operations and risk management. The bank is then rated at anywhere between AAA and C where BBB is deemed adequate.
At present the global custody ratings are commissioned privately. Custodian’s clients appoint Thomas Murray to rate their custodian and the results go no further than the three parties. The overall rating takes the above categories and lumps them together although there are, on request, separate ratings for he underlying categories and any other services on offer from the custodian.
Joanne Parker, a director at Thomas Murray, says that ideally the ratings will move into the public arena and become a benchmark by which custodians are measured. “The industry is coming round to the realisation that there is risk associated with custody,” she says.
The group is also working on risk assessments for overseas custodians and central securities depositories (CSDs). Also available on the internet is what Thomas Murray calls a ‘health check’ that allows firms to run a quick assessment of their custodian and to compare it with best market practice. To date the group has carried out £1.1trn in custody reviews for institutional investors such as pension funds, insurance companies and asset managers.

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