As an AFS licensee authorised to provide custodial and depository services, you are subjected to specific financial requirements. On September 7, 2023, these financial requirements were incorporated into the Section 912A of the Corporations Act.
Introduction of ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648
On September 7, 2023, ASIC introduced the ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 (ASIC Instrument). The ASIC Instrument preserves the financial requirements imposed on AFS licensee’s providing custodial or depository services developed in Class Order [CO 13/761, issued back in 2013. A comprehensive consultation process determined the continued relevance of the Class Order. The primary difference between the expired Class Order and the ASIC Instrument is the incorporation of the ASIC Instrument into section 912AC to the Corporations Act 2001, along with amendments to the definitions of ‘revenue’ and ‘excluded assets’.
Purpose of ASIC’s Financial Requirements for Custodial or Depository Service Providers
The purpose of the new ASIC Instrument, like the expired Class Order, is to reinforce the financial stability of custodial and depository service providers. It aims to achieve this by:
ensuring licensees maintain adequate financial resources to comply with the Corporations Act 2001;
creating a financial buffer to reduce the risk of a disorderly or non-compliant wind-up if a licensee's business fails; and
establishing financial incentives for licensee owners to comply with regulations.
Operation of the ASIC Instrument
The ASIC Instrument inserts section 912AC of the Corporations Act 2001, which creates financial obligations for AFS licensees that are custodians and depository service providers, with exceptions for entities regulated by APRA or those classified as market participants or clearing participants. The key requirements include:
Tailored Cash Needs
Licensees must prepare and approve a quarterly cash flow projection for the next 12 months, documenting calculations and assumptions. The licensee must thoroughly document the calculations and assumptions used in preparing the projection and explain why these assumptions are appropriate. This requirement is not new.
Net Tangible Assets (NTA)
NTA requirements vary based on the licensee's role. Incidental providers need at least $150,000 or 10% of average revenue. Non-incidental providers require the greater of $10 million or 10% of average revenue.
This requirement applies to all licensees that hold a licence authorisation to provide custodial or depository services, regardless of whether the licensee actually provides these services, acts as an incidental provider, or provides no custodial or depository services at all. Incidental providers can only avoid NTA requirements if another licensee holds the financial products related to custodial or depository services and that licensee complies with the NTA requirement. This requirement is not new, although in our experience many licensee’s that have no funds under management assume the incidental custodian NTA requirements do not apply.
Licensees meeting NTA requirements must hold at least 50% of their required NTA in cash or cash equivalents and 100% in liquid assets, ensuring readily available funds for financial obligations. This requirement is not new.
Licensees must obtain an audit opinion from a registered company auditor during the period during which the licensee was authorised to provide custodial or depository services. This requirement is not new.
Understanding Revenue calculation for NTA requirement
Under the expired Class Order, revenue was defined simply as having the meaning given by the accounting standards. However, the ASIC Instrument expands the definition of 'revenue' to include amounts paid or payable for fulfilling obligations related to custodial or depository services, even when performed by another entity.
This expansion means that revenue isn't limited to direct income derived from business activities but also covers payments made or payable for the fulfillment of custodial or depository service-related obligations, even when these obligations are fulfilled by an agent or authorised representative.
‘Excluded assets’ do not count towards the NTA of a licensee. The ASIC Instrument has modified the excluded assets definition, specifying that certain assets that the licensee has control over (eg an interest in a managed investment scheme, shares held in a CCIV, or investments in superannuation products) will now be considered ‘excluded assets’. Furthermore, ‘deferred tax assets’ are expressly now ’excluded assets’.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.