Custodians warn on beneficial ownership collateral damage

Major custodians are warning that they need to be treated differently when it comes to legislative amendments designed to enhance beneficial ownership disclosure obligations.

The Australian Custodial Services Association (ACSA) has warned the Senate Economics Legislation Committee that there needs to be explicit acknowledgement of the role of custodians in the Australian market and the dangers inherent in binding them too tightly to the fate of their clients such as superannuation funds and fund managers.

The ACSA submission argues that it is the clients who should be regarded as the primary targets, not the custodians.

“In support of Australia’s continued safety and soundness as an investment destination, ACSA seeks to ensure that a party who has fully complied with Australia’s legislative requirements is not affected by another party’s non-compliance,” the submission said

“Blocking of positions for, as examples, local and foreign pension funds, local and foreign asset managers, or foreign sovereign wealth funds could lead to significant negative press, and reassessment of the risk profile of investing in the Australian market if the legal and regulatory environment is perceived to be designed in a way that creates the possibility of a party having their assets frozen despite having fully complied with the law,” it said.

The submission is arguing that the legislation should “recognise beneficial versus legal ownership and the specific role played by licensed custodians in Australia.

Dealing with possibility of freezing notices, ACSA said that while it could not envisage a scenario where a local custodian could not respond to a tracing notice, in the event this were to occur there should be no capability for assets held via a registry, CSD, or by other similar means to be blocked or held due to that custodian’s failure to comply.

“Likewise, in the event that a custodian has responded to a tracing notice and a party underlying the custodian then does not do so, the freezing notice with regard to custodial holdings should always be applied by the party servicing the non-complying party, rather than via the company or registry,” it said.

“A licensed custodian’s holdings should never be frozen via a registry, CSD, or other similar venue. Rather the party facing the party who is not complying should be required to freeze the holdings on their books and records.

“This ensures that only parties who are not complying with the notices are impacted by that non-compliance, with no risk of contagion to the holdings of other parties.

Applying a freezing notice on the registered holder, when non-compliance with a tracing notice to an entity ‘down the custody chain’ may result in the freezing of assets for Australian Superannuation fund and Foreign Sovereign funds creating unintended market and sovereign risk.”