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David Braga … ‘I don’t think we’re at the end of the regulatory change program’

The Australian Custodial Services Association, which turns 20 years old this year, is a body whose importance in the superannuation and funds management industries has soared since the global financial crisis. It is also the only organisation of its type in the world – a single-country group representing the interests of asset servicers and, through them, their clients. Greg Bright spoke with David Braga, ACSA’s chair.

Custodians and other asset servicing companies tend to fly under the radar compared with managers, asset consultants, brokers and, of course, asset owners. Except when something goes wrong.

In the aftermath of the global financial crisis, the effects of which are obstinately lingering, they have been very busy not only dealing with a wrath of new global and domestic regulations but also with clients who have been adversely affected by the crisis. To add to their woes, most are owned by big banks which had separate issues and a sudden requirement for additional capital.

Braga, who is a managing director and product executive for investor services at JP Morgan in Sydney, took on the additional role as ACSA chair last year, when ACSA was getting to the pointy end of discussions for the implementation of the new superannuation regulations. He has been on the ACSA board since 2011. Pierre Jond, the previous chair, returned to Paris with BNP Paribas in December.

“I don’t think we’re at the end of the regulatory change program,” Braga says. “I think we’re right in the middle of it. There’s still a lot of activity in 2014.”

Unlike most industry bodies, ACSA has never sought to influence government policy agenda, but rather to be involved in the practicalities of regulations, industry standards and the never-ending search for greater efficiencies.

In discussions last year over the possible formation of an association of custodians who operate in the wider Asian region, ACSA was often referred to as a great model to emulate, although participants recognized that a single-country body has many advantages over one which would attempt to satisfy members across many countries.

Braga believes it is important for custodians to have their own body. “We’re the closest to knowing all the complex operations that funds perform,” he says. “So, when it comes to policy changes, it’s important that the custodians have a united voice. We have all the information and we know how things work.”

ACSA will often join with the Financial Services Council, which provides secretarial services to the association, on certain submissions or prepare and present its own through the various working groups. Braga would like to see ACSA build closer relations with other industry associations too.

In response to the Treasury paper on transparency, for instance, there were lots of questions on which ACSA had no opinion. But with the disclosure of portfolio holdings, the association has a strong interest in seeing the best outcome.

“We are not disagreeing with the policy objective but we’re trying to get the best outcome in the execution of the policy,” Braga says.

Initially, Treasury wanted full recursive look-through, which would involve hundreds of thousands of lines of data, possibly presented as one very long list. There were also some blanks, such as with derivatives and the treatment of currencies. ACSA prefers a more limited look-through to match that required under APRA reporting. The association also suggested a “materiality” clause over the top of the regulation because of the questions surrounding whether the publication of all the data would actually become a barrier to the desired outcome.

“At the end of this process I hope we can sit down with Treasury and talk through it all, as we did with APRA throughout Stronger Super, and give them some examples of what goes on,” Braga says.

With other associations, such as AIST and ASFA, which represent the super fund clients of ACSA members while FSC represents the funds management and insurance pool clients, there could be some interesting dialogue of a more pro-active manner around taxation, Braga says.

“The Government says it wants to reduce red tape. There’s an open question as to whether our tax environment is more complex than is necessary. We [ACSA] could probably do more communal work as custodians and get on the front foot.”

Custody, as the term is used these days, is far more than safe-keeping of records of trades. It is about the provision of information and, most recently, about making it simple for the client to get the information it wants.

Braga says: “We have the books and records but they are the clients’ books and records. In the past five years the clients have realised that there is a lot of value in their having the right custodian to help them achieve their strategic objectives.”

This is evident from some of the big recent custody tenders by super funds, where the fund executives have said they want a new type of relationship with their service providers, which can reflect the uncertainty of the environment ahead and be flexible to adapt to it.

In such an environment, price should not be the differentiator that it has been in the past. If a custody tender comes down to price, this most likely reflects a lack of understanding by the client and, certainly, a lack of communication skills by the custodian.

“Price is a weapon which is, occasionally, used by people tactically,” Braga says, “rather than being a real differentiator.”

While many people in the superannuation industry believe all the work has been done on the regulatory changes started by the old government and continued, mostly, by the new, custodians know that final implementation is a different story.

Stronger Super requires the introduction of new annual and quarterly forms this year, which are more complicated than the old ones, with more questions to be answered and still need some working through with APRA over the detail.
Then, there is the ASIC revised RG 133 released last November, which takes effect from next January, which relates to whether the asset holders can demonstrate they have a hold over the assets. It has to do with ‘suspicious matter’ reporting, which will give custodians the right – and onus – to talk with the regulator without asking the client. An example may be suspicious valuations of unlisted assets. There is, at least, a new clarity in the regulations, Braga says.

The “omnibus relief” under the new regulations is also a tricky topic. This is where the custodians have put all their clients’ assets into an omnibus account, which, however, may offer a chance for access by the wrong client. ACSA members need to figure out how they will comply with the new rule by the end of this year.

And, in a similar vein, there is the handling of ‘special assets’, which ASIC recognizes are difficult for the asset holder to hold. These are mainly to do with things such as options, which the custodian may need to hold, even when it doesn’t want to be the counterparty to the option. This is being resolved with changes such that the actual counterparty, such as the broker, must take directions from the custodian as to who is to be paid.

“We now have much more surety as an industry with the known rules,” Braga says. “The bigger point is that this means there is likely to be more confidence in the system.”

Braga came into custody from the funds management side, working in technology at the old BT Funds Management through the 1990s. He ended up as the technology manager for BT Portfolio Services, which offered its capabilities to the wider market in a similar way that Perpetual’s and AMP’s asset servicing arms did at the time. (All these businesses were sold: Perpetual to RBC, AMP/Cogent to BNP and BT to what was then Chase Manhattan, which merged with JP Morgan globally).

In his current role, Braga gets involved in solving problems for the likes of BT, Vanguard, AustralianSuper, One Path, Schroder, HESTA, First State Super and STC (State Super of NSW).

Looking out at the longer term, he believes that the big challenge will be to introduce international best practice to Australia, which is still a relatively small market but with its own peculiarities, especially to do with tax.

[The ACSA] mission statement is about market efficiency and international best practice,” Braga says. “How do we sensibly introduce best practice to the Australian market? We want to avoid Australia being a ‘unique anomaly’. As a practicality, for example, Australia should really use SWIFT [messaging system] rather than proprietary CHESS messages. Australian accounting and tax treatments need bespoke work compared with other jurisdictions.”