It’s tough making an honest euro in custody banking. Users of these services might be forgiven for thinking that wherever banks can bury sharp practices in obscure parts of their businesses, they will – and the findings of the UK finance regulator’s recent investigation into transition management won’t put their minds at rest.

As the article in our special report finds, one of the reasons that State Street’s transition management division thought it could get away with brazen overcharging was that it was a small fish in a large pond. The Financial Conduct Authority found that the audit functions at the bank overlooked what it was getting up to.

A crumb of comfort for the industry came from the FCA’s insistence that clients have a responsibility to monitor what their service providers are doing for them, in order to raise industry standards. Those clients might ask what chance they have of picking up on problems if internal monitors fail to do so. Management at the banks are probably asking whether it’s worth trying to make a euro from this kind of marginal business if it’s not possible to do it honestly – while they deny that the FCA investigation has been a catalyst, a number of big names have withdrawn from transition management recently.

If the FCA’s solution to that scandal is essentially more client scrutiny – and presumably more engaged client relations from the banks – the results of this year’s R&M Consultants’ survey are worrying. It found 748 clients marking every single one of the custodians in R&M’s league table down on customer service, and suggested that the pressures of cost-cutting and new securities regulation was to blame for sucking resources away from client-facing activity. We take the industry’s pulse off the back of these results in our report.

The irony is that all the hard work being done to get ready for AIFMD, FTT, Form PF, CFTC, Dodd Frank, EMIR, T2S, UCITS 5 and a host of other acronyms ought to set custodians up for more business, of greater complexity and higher margins. 

The coming revolution in the clearing of OTC derivatives, in particular, has the potential to create massive demand for collateral transformation and optimisation solutions from investors, and help with trade-reporting. Investors will need an agent with a comprehensive view of their portfolio holdings – the sort of view that, arguably, only its custodian really has. As Emmanuelle Choukroun, director at Société Générale puts it: “Custodians are best placed to have a view of client inventories across various locations, because that is our core business.”   

Not everyone agrees. Some observe that the predicted collateral squeeze has not – and will not – happen. Suffice it to say that at least one leading European pension fund investor, PGGM, takes the prospect seriously enough to start taking action: see Ido de Geus’s comment article. Others warn that few custody banks have made much progress towards de-siloing their derivatives, securities lending, financing and repo businesses – as they must if they are to offer genuine help with collateral-management challenges.

There is surely a great opportunity here for the industry, once it has come through the initial shock of all the changes. But that opportunity might be threatened if banks fail to engage with clients, and clearly communicate their strategy to them over the coming months.