Scrooge McDuck loved to splash with cash, swimming solo in the deep, impregnable bank vault that housed his money.
The famous image of McDuck diving into his millions is typically interpreted as greed cartoonified.
But the loaded old duck had his reasons.
As the second-richest fictional character of all time – worth US$33.5 billion, according to Forbes magazine – McDuck clearly put a high value on two of the most important features of money: liquidity and security.
Unlike mega-wealthy Disney characters, though, most people don’t have the luxury of scheduling skinny-dipping sessions with their liquid assets at all hours. Everyone else has to entrust their puddles of money into the care of banks.
Banks for their part have a legal ‘safe-keeping’ duty to “unconditionally hold depositors’ assets or funds (distinct from its own assets and funds) in its vaults and return them when requested by the depositors”, the online Business Dictionary says.
Even as the physical form of cash has faded somewhat in the digital era, the banks’ core safe-keeping promise remains intact.
Barring a systemic crisis, deposit-holders can expect their cash-at-bank to be available on demand… or they get their money back.
If the chain of responsibility between institution and account-holder is reasonably-well understood in banking relationships, the same is likely not true when it comes to other financial arrangements.
At a fundamental level, investing involves shifting money from the (hopefully) safe-house of a bank into the hands of individuals or entities bound by potentially less-stringent security rules.
However, NZ retail investors do enjoy a high degree of protection if they opt for regulated products, according to InvestNow founder, Anthony Edmonds.
“For example, all the funds on InvestNow are retail products policed under tough regulations New Zealand or Australia.” Edmonds says, “under New Zealand regulations the underlying PIE funds have third-party oversight from supervisors to ensure they comply with the law and their investment rules.”
“They are also independently-audited each year and, importantly, use external custodians to handle the actual flow of client money. The regulations in NZ mean that the supervisor has responsibility for the custody arrangements, not the fund’s investment manager”
He says while custody is probably little-understood by retail clients, investors ignore it at their peril.
“There’s a whole lot of investors in ‘funds’ managed by David Ross that probably regret not asking about his custody arrangements,” Edmonds says.
In 2013, the Wellington-based Ross was sentenced to over 10 years in jail for defrauding investors of $100 million plus in a long-running ‘ponzi’ scheme.
“Essentially, Ross was able to fool investors for so long because as well as making the investment decisions he also both handled all of the investors’ money and reported performance back to them,” he says. “That’s a recipe for disaster written on the back of a spreadsheet.”
Edmonds says clients should be suspicious of investment propositions that don’t involve a reputable third-party custodian.
Investors can look through offer documents of all licensed providers to find out how providers handle the real flow of money, he says.
“If you don’t see an independent custodian handling investment transactions, you’re taking on extra level of risk,” Edmonds says.
And that need for oversight applies equally to fund platforms like InvestNow. “Some platforms also act as custodian, which effectively means they can touch your money,” he says. “But InvestNow uses a third-party custodian, Adminis, which handles all client transactions – we never get to touch your money.”
Even if InvestNow closed down, client funds would remain safe within the Adminis system. The Wellington-based Adminis is also closely scrutinised by both independent auditors as well as regular IT security reviews.
“We were very careful to select an independent custodian that is transparent, trustworthy and capable of meeting our clients’ needs,” Edmonds says. “Amazingly, even after the Ross fiasco, some NZ investment providers can still get away with doing the custody themselves, often through a related party entity.”
He says another NZ custody anomaly is also due for a change following a 2016 International Monetary Fund (IMF) review.
The IMF report highlighted NZ as a global outlier in its regulation of custody providers, which essentially operate outside the formal licensing regime here. However, the Financial Markets Authority (FMA) is currently considering proposals to bring custodians under the licensing system that applies to most investment firms in NZ.
“It seems incredible that custodians in NZ – who actually have day-to-day control over investors’ money – don’t need a licence,” Edmonds says. “We welcome the FMA push to regulate custody providers and hope it applies across the board.”
Custodian licensing would add another layer of security to the digital vaults that hold the investment assets of millions of New Zealanders.
Better custody rules won’t allow investors to go swimming Scrooge McDuck-style with their dollars, but they can, at least, gain some assurance that the money won’t mysteriously leak away.