UK regulator targets custody industry reforms

Low profit margins and long contracts between banks and investment managers are impacting the competitiveness of the custody space, according to the FCA.
By Paul Walsh
The UK’s Financial Conduct Authority (FCA) has set its sights on the custody industry by citing issues around a lack of competition, outdated technology systems and cyber crime in its 2017 mission statement.

One of the major issues is around the number of providers offering custody as a singular core service, due to low profit margins.

The FCA also cited the lengths of contract terms between providers and investment managers as an issue.

“There is a small number of custody banks providing services in the market, but we do see evidence that firms compete on price for core custody services,” said the FCA statement.

“Contracts are usually around 10 years in duration, creating barriers to switching providers.”

The lack of custody as a core service is allegedly driving the need for banks to offer additional services such as FX trading and securities lending in a bid to boost revenue, said the FCA.

The FCA said the bundling of these custody banking services may prevent investment managers from being able to “shop around” to obtain more competitive offers.

“Low profit margins also deter custody banks from investing in modern technology systems. We remain concerned that the failure to upgrade existing systems could negatively affect the sector.”

“The reliance on out-of-date systems could create an additional barrier, preventing asset managers from switching to other providers,” said the statement.

Concerns were also expressed over custody banks investing in new technologies, while their resilience and resistance to cyber attacks will be evaluated in the coming 12 months.