RBC to exit Australian custody after deal with Citi

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by Greg Bright

RBC Investor & Treasury Services is to end its 18-year involvement in the Australian asset servicing market, having reached a memorandum of understanding with Citi Australia to allow for the novation of its fund manager clients. Several big RBC clients have already signed non-disclosure agreements to commence negotiations with the new provider.

The deal is expected to be consummated in the new year. Both parties have prioritised the future employment of as many as possible of RBC’s 150-odd staff in Sydney in their discussions, although this is likely to depend on which clients come across after their individual discussions. RBC I&TS is the only custodian and asset servicing firm operating in Australia which specialises in providing custody – including fund accounting, administration and unity registry – to fund managers. RBC does not service pension funds outside of Canada.

Francis Jackson, RBC’s UK-based chief executive of investor services, told a “town hall meeting” of most of the RBC I&TS staff last week that the business was being shut down and rights awarded to Citi to approach and negotiate with clients. Many of the larger clients will probably now perform formal reviews of their asset servicing operations and perhaps go to open tender.

The oldest major client affected by the decision is Perpetual Ltd, which started RBC’s journey in Australia by selling its Perpetual Funds Services business unit to the Canadian bank in 2001. But some others also have significant assets and growth prospects – most now acting under the NDAs. Key clients include Legg Mason, Pinnacle Investment Management, Wilson Asset Management, Yarra Capital, Bennelong Funds Management and BetaShares.

Interestingly, when RBC acquired Perpetual Fund Services, it made offers of employment to all of the estimated 300 staff. It also invested heavily in its own systems. Not only did it keep its unit registry inhouse, while most other big custodians outsourced this to OneVue, it also invested in a bespoke system to handle listed vehicles such as ETFs. Both BetaShares and Wilson Asset Management are important clients for that service.

RBC I&TS held $122 billion in Australian-sourced custody assets as at June 30 this year, according to the latest six-monthly figures from the Australian Custodial Services Association (ACSA). This was up 15.5 per cent on six months earlier. If all of the RBC clients were to novate, when added to Citi’s $506.7 billion under custody, this would put Citi at number two in the ACSA market share figures, leapfrogging the current number two, NAB Asset Servicing, which was on $564 billion as at June 30 this year.

When Jose Placido, a senior vice president of RBC who went on to become the chief executive of investor services, came to Australia to announce the Perpetual Fund Services deal in May 2001, several of the smaller players in the market had either exited or were looking to do so, mostly because the businesses did not fit well with their funds management operations. Outsourcing, from the provider’s perspective, is not as easy as it seems. Scale is important and the technology budget can be scary.

Westpac, for instance, exited master custody because of pressure from its biggest domestic custody client, State Street, which had a strong presence in the space then, as now. State Street brought the concept of ‘master custody’ to Australia in 1986. A pre-Westpac-owned Bankers Trust, had even built a special facility to house its outsourcing business, in Adelaide. AMP had expanded by inheriting UK-based Cogent through its purchase of funds manager Henderson, merged its Australian custody arm with Cogent in 2000 and then exited in 2002 with the sale of the expanded custody business to BNP Paribas, booking a profit in the process. Like Perpetual with RBC, AMP has remained an important client for BNP. They were tumultuous years in the space.

Complicating matters even further, State Street sold most of its super fund business to Commonwealth Bank, who not long later sold it to NAB. ANZ sold its custody business to JP Morgan, after two bids, the second being a lot lower than the first. NAB is now the sole remaining Australian-owned custodian. HSBC retained a focus on domestic custody, eventually getting the State Street sub-custody business, but, interestingly, has in the past couple of months made noises about expanding into master custody. HSBC has called for CVs from custody professionals for its new plans.

Citi had concentrated on global and domestic custody, with Colonial as a major client, but in recent years has picked up master custody business too, including its first industry fund client, HostPlus. It had previously provided that service for the Commonwealth Bank’s staff fund, though. This year Citi won NSW Trustees for master custody in an open tender. Another big Citi client for global custody is NAB, which had had a 20-year relationship with BNY Mellon previously.

Martin Carpenter, head of securities services at Citi Australia, said: “Citi is delighted to enter into the memorandum of understanding with RBC, a move that reflects our commitment to the custody and fund services business in Australia. There is a strong alignment between the two businesses, and Citi is well placed to meet RBCs client needs, particularly given Citi’s middle and back office service strengths and value-added capabilities.”

Two of the interesting alignments between RBC and Citi at the operational level are:

  • Citi has used the Multi-Fonds system in Australia since 2008 and has about a dozen clients on it. This is the same system RBC uses in most other countries and had tried to implement in Australia to replace SS&C’s Hi-Portfolio. The development and transition did not go well, only partly being implemented. Most of the dozens of IT contractors were let go in September, as previously reported; and,
  • Both firms have regional processing hubs in Kuala Lumpur. Whatever RBC staff is retained don’t have far to go either – both have office space in the 2 Park Street, Sydney, building.

If it retains the bulk of RBC’s clients and also recruits a good number of fund accountants and other RBC staff the deal will give Citi a significant lift in its capabilities and efficiencies through extra scale.

In a statement for this newsletter on behalf of RBC I&TS, Francis Jackson said: “We have entered into a memorandum of understanding with Citi with the intention to facilitate an orderly transfer of our Australian investor services business. We will be working with Citi to engage our clients to discuss the opportunity of a timely and efficient transfer of their business.

“We are proud of the business we have established, the strong relationships we have forged with our Australian clients, and the calibre of our people. However, after careful consideration, we have concluded that the complex and dynamic nature of the market in Australia meant it was difficult for us to grow the business to the size and scale required to deliver meaningful value for our shareholders and clients.

“We consider that it is in the long-term interest of our clients and employees to seek a transfer of our business to an organisation with a client focus and strong offering in the market. We thank our colleagues and clients for their partnership and remain committed to supporting each of them during this period of transition.”

There’s an old joke which is relevant here. It goes to the RBC offer of employment to all 300 of the former Perpetual Fund Services employees back in 2001. About half that number of RBC staff are currently servicing much more by way of funds under management 18 years later. Specialist custodians are lean operations. Investment management firms are not so lean.

The joke is: “A fund management marketer walks through the backoffice of his firm and boasts that he has just won a big equities mandate. ‘You are about to get a lot more work,’ he says to whoever is listening. The head of investment operations pipes up: ‘That’s nothing. We just settled a trade in Italy’.”

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