How does technology impact custody mandates?

The technology revolution roundtable

Part 1: Super custodians and administrators contest their share
Part 2: How does technology impact custody mandates?
Part 3: What is driving change in the custodian/administrator space?
Part 4: The impact of currency hedging
Part 5: The cost of Stronger Super
Part 6: What will technological change bring to superannuation?

A Super Review roundtable attempts to determine where technology now enters the custody mandate equation.

Mike Taylor, managing editor, Super Review: Alex Hutchison, speaking as a fund CEO: there’s a custody mandate out there and your trustee board is looking at what you’re going to do next. Where does the technology equation come in on that? How key to what you’re going to ultimately decide is the technological underpinnings of that?

Alex Hutchison, CEO, Energy Industries Superannuation Scheme: We’ve got to be clear about what we want to do. What we want to do is ensure our members are looked after.

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Custody is an area where, from a risk point of a view and also from a financial obligation point of view, let alone regulatory point of view, is probably outsourced. I’d be scratching my head a bit if somebody came around said, ‘I’m going to do self custody’ in our situation running the funds such as the ISS.

In saying that, there is the competing balance between ‘we aren’t technology, that’s not our business – our business is to run the fund’ and also the clients and scale we want to take benefit of. 

What’s expected from an APRA point of view or reporting point of view is that, as a consumer, I want to go preferably to one source, probably the custodian, and say, “I don’t want to go to a third party, I don’t want to run my own separate internal data warehouses. I just should be able to go online or ask you for a report and receive that report’.

I think that’s what the future is, and I think you’re seeing now in the industry some tension between custodians and administrators, where some administrators frankly are stepping in and saying ‘well, you know what, your custodian can’t do that’ or ‘your custodian wants to charge you too much for that, maybe I can supply it for you’.

I’d be more comfortable if custodians could step in and simply provide it to me at a proper cost. That’s where I see things now for the current challenges we have.

Peter Hill, managing director, SimCorp: So there’s the opportunity. There’s the opportunity for our custodian friends to extend it, because clearly if you can get closer to your client and provide that whole sort of technology play – from trading and execution right through to the investment administration and the data requirements – there’s a business opportunity in it for yourself.

Because you can also then start to do things like subsidiary, daily reporting, that sort of stuff. You can provide a whole lot of other solutions because you’re quite timely and integrated with their requirements.

David Braga, managing director, J.P Morgan WSS: Yeah, I think this is something we’re all well aware of. The question is, where do you start to run out of what’s actually native to you?

So what’s not native to us is probably the member administration side, that aspect of it.  As soon as you talk about the assets of the fund, that’s the natural place for a custodian to be providing and reporting the right integrated services.

We’re starting to see that just because you’re dealing with the assets of the fund, it doesn’t mean it doesn’t touch a member.

The types of things that AustralianSuper has done with the things like Member Direct means that there’s now connectivity straight from the custodian directly to the member and vice-versa, in a way that never existed before. And custodians are ready for that and need to be ready for that.

I think Alex’s observation is on that fringe point where, as a fund, you need to aggregate all of this information and make sure that everyone’s providing the right answer to do that elegantly. But I think custodians will always start to say once you get to real hardcore member administration, that ‘that’s not something that’s really our native space’.

Alex Hutchison, Energy Industries Superannuation Scheme: Don’t you think the industry’s changing and that that model’s being now challenged, where the barriers are coalescing in relation to what the expectations of the clients are – leaving aside the point obviously from the regulatory point of view, ‘do you want to have segregated assets?’ You know people would rather deal with one source or get the answer from one provider.

Peter Baker, head of client strategy communications, BNP Paribas: I think that’s an evolving business model, for sure.

Alex Hutchison, Energy Industries Superannuation Scheme: Sure – and that’s all.

Peter Baker, BNP Paribas: No doubt.

Mike Taylor, Super Review: I must say this is the first time I’ve actually heard of administrators perhaps thinking about mowing a little bit of custody grass. Is this a widespread thing, or is it just something you sense out there?

Alex Hutchison, Energy Industries Superannuation Scheme: All I can say is that I’ve had conversations with administrators who say, ‘well, we can do that for you cheaper’.

Not your custody but some of the reporting and some of the analytics that you need to satisfy your business and regulatory obligations. That’s all.

David Mackaway, general manager of operations, Challenger: I think it’s...

Alex Hutchison, Energy Industries Superannuation Scheme: Not doing pure custody.

David Mackaway, Challenger: From the Alex’s point of view, I think the whole conversation is evolving as the breadth of assets that we all need to provide to end members is growing. 

The complexity of those assets is also growing, and how they want to actually determine what assets they’re participating in is changing.

The landscape is definitely changing. At the beginning or the backend of the process, custody is thinking about how we can move through the value chain. Administrators who were standalone administrators are thinking how they can participate?  

And then to David’s point: certainly what Australian Super are doing through Member Direct – even that is now blurring how a member interacts back into custody as well.

So I think there’s lots of change in the landscape happening. Everyone’s questioning the old-world paradigm, and whether the way we made this work isn’t necessarily the right model anymore. How does everyone play a role in it going forward?