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Won ’ t somebody think of the custodians …
can picture the sarcastic introduction of a tiny violin being played by anyone I ask to
I feel sorry for a custodian bank . An imaginary tune being played with thumb and index finger upon highlighting the hardships facing organisations sitting on trillions of dollars of assets . But custodians are an essential part of the financial ecosystem and need to be protected accordingly . To keep upping the pressure through regulations , scrutiny of business models and calls for lower fees could result in the adverse effect of forcing more players out of the market . Especially given that competition is one of regulators ’ biggest concerns . In the first half of 2017 we ’ ve seen a series of additional headwinds , combining with the decade-long hurricane of regulatory changes squeezing profits and forcing an entire rethink of business models . These new business models are now subsequently being scrutinised by regulators , completing the final arc of the vicious circle . There was genuine frustration in the voices of industry veterans as we discussed the UK ’ s Financial Conduct Authority ’ s ( FCA ) sudden interest in custodians .
Suddenly the watchdog has pointed out the bundling of custody services as a ‘ competition issue ’. But the evolution of this range of services was down to the low profit margins of custody as a single service , stemming from regulatory changes in the first instance . The old model of custody simply isn ’ t an option anymore , and the alternative is to exit the market , which in turn would lower competition . So while the regulators seem to feel the need to make noise about costs and competition , they are at risk of pulling too many blocks out of the Jenga tower . At the same time , our cover feature in this issue explores the world of asset managers and their own fee troubles . Ultimately , asset managers have little choice but to minimise their overheads as they are having to lower the fees they are passing onto their clients . Again , the FCA has intervened here , demanding answers as to why active management fees remain pre-set at what it believes are uncompetitive levels . And it ’ s custodians who will feel the strain ( p . 22 ) as asset managers look to save elsewhere . It seems likely that in the near future there will be rules on concentration risk around the safeguarding of assets , which could see the biggest asset managers look to split their custody services . This would be similar to BlackRock ’ s recent move of $ 1 trillion of assets under management from State Street to JP Morgan for custody and fund services , while leaving its ETFs business with the former . There could also be further transparency rules and pressure on updating technology systems . Both regulators and clients could end up demanding that custodians keep up with the fast-moving world of disruptive technology . Unfortunately , the tangled web of legacy systems continues to hold back any major developments . While this is a crucial priority for securities services firms at present , it represents yet another pressure and huge cost centre on top of an ever-growing list .
Jonathan Watkins Managing Editor Global Custodian
EDITORIAL
Editor JONATHAN WATKINS Tel : + 44 ( 0 ) 20 7397 3815 jonathan . watkins @ strategic-i . com
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Global Custodian ( ISSN 1047-8736 ) is an Strategic Insight publication . © Strategic Insight 2017
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6 Global Custodian Summer 2017