Q: What are the dangers for consumers in investing in products that don’t have arm’s length custody arrangements?
A: Without having an arm’s length( independent) custody arrangement the investor loses all protection on how those funds are supposed to be invested. This means the funds could be used for anything as opposed to investing in line with investors instructions.. This is particularly important if the company who is providing the solution gets into financial difficulty . An independent custodian has a duty to protect investors assets and segregate them so they cannot be used if the investment entity or a non-arm’s length custodian gets into financial stress. Investors assets cannot be used to pay off other debt.
Q: How can investors make sure the products they use have an independent custodian?
A: The offer document in our case the Product Disclosure Statement (PDS) will provide you with information on who the Custodian is and their background. It is normally included in the area of the PDS “Who else is involved?” if you can’t find it in the offer document you have you should call the company who is offering the investment to find out if they have one and if they don’t “buyer beware”For Mint our custodian is Public Trust . Confusingly though the custodian company, by convention , is described as Mint Nominees which makes it sound like Mint own the company. This is not the case . Mint nominees is a Public Trust entity controlled by the Directors of Public Trust . No Mint Directors are involved in handling client investments or withdrawals.
Q: Do you think all custodians should have to be licensed and meet similar professional standards?
A: Totally. One of the core responsibilities of the Financial Markets Authority (FMA) is to provide confidence for New Zealander’s in our investment markets. The most important thing you need to know is that all licensed providers of financial services products are regulated by the FMA and all investments they offer have to have a Custodian. So if you are looking at an investment that doesn’t have a Custodian you know it’s not regulated which again should be a warning not to invest unless you really know what you are doing. Actually licensing custodians as well as fund managers who run the funds is common overseas and a missing piece of regulation in New Zealand. After all they are the people holding the cash and assets of investors . The balance sheet strength of these entities is very important to ensure safeguarding investors funds.