“It is rare to see scores decline so comprehensively as they have done this year,” remarks Richard Hogsflesh, managing director of R&M Consultants, reflecting on the response to his firm’s latest annual survey of 748 custody banking clients. “In the past, declines have been linked to falling market values.” 

The demand on custodian resources to meet client needs as the regulatory environment changes so rapidly – AIFMD, FATCA, FTT, Form PF, CFTC, Dodd Frank, EMIR, T2S, Rule

442, UCITS V, Myers-Brigg, and more are just around the corner – might be draining their energy from up-front client relationship management into these more recherché areas, Hogsflesh suggests.

Perhaps a little surprisingly, the survey gives the best rating to Pictet – the Switzerland-domiciled private banking group, not one of the giant US-originated global custodians. It does not custody huge volumes of assets, nor many pension schemes, but tends to be focused on private wealth management. This could help explain the high rating it received, although even Pictet’s score, like everyone else’s, declined year-on-year. 

Other custodians, operating in an environment of thinner fees and bulkier asset portfolios, will face a differently-weighted portfolio of challenges. The survey also has limits. Alongside Pictet, the custodians in it are BNY Mellon, BNP Paribas, Credit Suisse, JP Morgan, Northern Trust, State Street, UBS and RBC. This leaves out quite a number of custodians that have strong single-country or regional franchises. 

Geographic breakdown of the ratings also reveals a more nuanced picture. For instance, BNP Paribas is top-rated in Germany, where it is busy building business by growth and acquisition. In the Nordic region, JP Morgan and Northern Trust both dominate. In the UK, asset owners, including pension schemes, do not include Pictet in their ratings, giving top places to Northern Trust and State Street.  


“There is no doubt that this is a challenging business environment,” says Etienne Deniau, global head of business development at Société Générale Security Services. “Custodians are facing multiple challenges set by new regulations.” 

From SocGen’s perspective, the deadline for AIFMD is only one in a series that is starting to look like a hurdle race. FATCA obliges asset managers to know their clients. This involves a lot of box ticking – exiting investors must be assessed under FATCA just as much as those joining. “This is not as easy for private banks as you might think,” adds Deniau. “We do some processing related to it for our clients.”

 EMIR is more complex, requiring the completion of over 300 data fields per fund. “This is a larger challenge for us,” he warns. “For instance, we have clients with contracts for difference in different jurisdictions.” 

EMIR requires custodians to manage contracts and confirm pre-booking with credit depositaries. “Pricing is an issue here, as is independent valuation,” says Deniau. “We have to provide both.”

The wave of regulatory change affects every type of institution with which continental and global custodians do business: free-standing pension funds, private banks and wealth managers, bancassurers, insurance companies, independent asset managers, offshore ‘alternative asset managers’ and so on. Some regulations are more or less uniformly applied to all client monies and assets, others are specific to a client group. US regulators are also proactive in extending their range beyond national borders and imposing hefty fines. 

There may be some increase in dissatisfaction with custodian services but little has changed in terms of the generic legal relationships between custodian and client. These tend to be very similar, between the clients of each custodian and between the custodians themselves. 

“I have seen little change in contract terms over the past five or six years,” notes Jane Kola, a partner at pension specialist law firm Wragge, Larwence, Graham & Co. 

Discussions with clients turn centrally around services and liabilities – which service and who exactly is liable for what – and the current key concern for trustees is safety of assets.

“The first question is often about whether assets are held in nominee accounts and not mingled,” adds Kola. “Second, if it goes wrong, when can we get our money back?” 

In terms of contract, safekeeping and other core custody are defined within a fairly standard contract, the terms of which are rarely altered. Issues such as collateral management, security lending, and overlays will usually be covered by separate contracts. 

“Remember that custodian-client relationships tend to be open-ended,” adds Jessica Hynes, a senior associate who runs the custodian data base at Mercer’s Sentinel Group. “I have seen contracts in force since the 1990s.” Despite this, the source of custodian revenues has changed substantially over the past five to six years. “We used to see custodian revenue from three important sources: direct fees on core custody, cash and FX management and security lending.” These each contributed roughly equal amounts of income. “Now the income from cash management, FX spreads and security lending have all tended to shrink dramatically,” Hynes adds. 

The custodian bank response has been to exploit economies of scale and, where possible, to offshore into lower wage economies. But a crunch is coming. 

“Being in the business of global custody probably costs each bank around $600m per year,” says Hynes. “There may be ways of reducing this cost but they risk impairment of services.” 

Fees, particularly direct core fees, cannot be further compressed and may be set to rise. The key reasons for this lie in the IT requirements of global custodians, and the more complex regulatory environment. This might also help to explain some of the criticism of custodians thrown up in the R&M survey. Custodians devote attention and resource to clients in business sectors where they want to build a portfolio. Some are more focused than others in this regard. BNP Paribas’s success in Germany is a case in point. 

Discussing the R&M Survey with custodians, reactions are mixed. Most don’t feel like going on record but there are exceptions.

“The survey shows there may be areas where banks can improve,” agrees Penny Biggs, head of the EMEA institutional investors group  at Northern Trust. “But that is likely to be true when so much regulatory change is under way.” Serving an asset manager, or a pension fund, or a sovereign wealth fund are not quite the same thing. “Not all custodians have the size or flexibility to reach all parts of the market with equal service levels,” she adds, “and client preference, say in relation to communication and reporting issues, can also vary quite significantly.” 

It is also noteworthy that there has not been a significant uptick in the volume of custody mandates or the frequency with which custodians are replaced. It looks as if most contracts will be renewed until the market absorbs the current wave of regulation. There is also little room for further consolidation among the five or six truly global custodians. In two to three years’ time, we will see the true consequences of current regulatory change.