To advise a client on which global custody bank to do business with, a pensions or investment consultant will be scrutinising not only the core services required - securities, income collection, safekeeping and corporate actions - but a full range of others.
Any consultant who can grasp the nettle in all the areas is presumably worth his weight in gold. There can be no doubt that banks can fare considerably better or worse than others in this sphere and richly de-serve to be rejected or recommended on account of it. So that their clients can make an informed decision before jumping into bed with them, the banks need to be carefully appraised and graded accordingly.
A very tall order for consultants you might think?
Not according to the major consultancy firms who advise their clients on which banks to use regarding custodian and securities services.
Mike Faulkner, an asset management consultant with Towers Perrin in the UK, believes their qualifications lie in their ability to research custodians effectively and understand what makes them tick; to trawl their systems and balance sheets and evaluate their resources; to assess their investment in technology and make an informed decision on the usefulness of the products and insurance cover they have in place.” “In our experience,” he says, “banks are only too pleased to open their doors and give information to us because they realise that’s an opportunity for them to ac-quire a substantial slice of business from our pension-fund client base, if they meet our stringent criteria, and we are able to recommend them to our clients.”
The kind of custodian bank that Faulkner would not be able to recommend is: “The one that has taken a lot of new business too quickly and become overstretched and unable therefore to service its clients very well, so is probably getting a bad press. Or a high-profile bank undergoing a lot of organisational changes - perhaps in the process of a merger or takeover - where it is no longer clear how well it will be managed in future or whether the different businesses and types of technology that are being brought together will mesh smoothly. Such a bank becomes a source of uncertainty. It may, or may not, have been a very good custodian bank, but the question is, will is continue to be so, will it be the better for organisational change? That’s what my clients want to know.”
The US banks, some of whom charge upto 150% higher fees for custody in the UK, are often ignored by British and European clients in favour of a “safe” British clearing bank. While a US bank might offer an all-singing-and-dancing, system -driven, high technology and reporting service, not everyone in the UK or European pensions industry needs such high level reporting.
Brian Hill, an investment consultant with Watson Wyatt in the UK, says that if he were looking to recommend a domestic custodian bank in Britain “Royal Bank of Scotland (RBS) would have to be first” also recommending it for operations “in Europe as well.”
There can be no doubt of the rise and rise of the RBS in the custody sector (RBS Trust Bank since it bought SBC Warburg’s custody business) which, according to consultants, is due to its settlement performance ratings. This, they claim is one of the very best.
When recommending a global custodian, Hill would be “surprised if it weren’t a US bank, such as Citibank, State Street, Northern Trust, Banker’s Trust and Morgan Stanley when they closed the deal with Barclays.”
Certainly Citibank - as the biggest world-wide clearing bank and the only major custodian that does not need to use a sub-custodian network for its corporate treasury and custody services - would seem to be way ahead of the field (most of the other players use sub-custodian networks, including those of Citibank). Faulkner says that sub-custodian networks are crucial “because it’s important for custodian banks to stay ahead of the game, so I would be impressed by evidence of a major custodian continuously enlarging its sub-custodian network.
Clearly there are many considerations for fund managers in their choice of domestic, regional and global custodian banks in Europe and consultancy firms seem to be playing an increasingly important part in the decisions that are made for and against different banks.
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