Contents
The Financial Markets Authority (FMA) is seeking input on how New Zealand’s custody of assets regime should be updated to reflect market growth, outsourcing models, offshore custody chains and new technology.
Submissions on the discussion paper close at 5pm on Monday 27 July 2026.
Scope of review
Custody arrangements sit behind a wide range of financial services, including KiwiSaver and other managed funds, discretionary investment management services (DIMS), retail investment platforms, broking arrangements and emerging payment and digital asset services.
Problem diagnosis
The FMA paints an unflattering picture of the existing regulatory structure, describing it as:
- complex, fragmented and uneven in terms of its application across different sectors, creating uncertainty amongst market participants over who is legally responsible in circumstances where custody is outsourced
- inefficient and duplicative, with overlapping obligations applying to licensed entities, outsourced custodians and sub-custodians
- reliant on an obligations-only model that:
- doesn’t allow entry screening or require a fit and proper person test or an assessment of financial resources
- doesn’t include business continuity or operational resilience requirements
- provides limited regulatory oversight, intervention and enforcement tools, with correspondingly weaker protections for investors;
- exposed to concentration risks in areas where a small number of providers hold a large proportion of assets, creating vulnerability to fraud, operational errors, system outages, cyber-attacks and other business continuity events
- limited in its treatment of conflicts, operational resilience and cyber risk
- largely unregulated in the wholesale custody space, and
- not well adapted to innovative advances, including in payment services and virtual assets.
The discussion paper also notes that the International Monetary Fund (IMF) recommended in 2017 that custody services in asset management should be licensed and subject to supervision and that the IMF is due to complete a further review in 2027-28 with custody a likely focus.
Reform directions
The discussion paper doesn’t propose specific solutions but asks whether efficiency and consumer protection could be improved by:
- ensuring more information on custodians is available
- providing a simpler and more consistent custody framework with a single, clear set of obligations that apply for all custodial services
- stronger minimum standards for custodians, and new requirements for business continuity, cyber security and incident reporting (which might include licensing or authorisation of custodians)
- reducing complexity, overlapping obligations and dual supervision
- greater focus on independence conflicts management
- closer scrutiny of wholesale custody, and
- future proofing the regime to allow innovation and growth and to address risks from market developments and emerging technologies, including in payment services and virtual assets.
It also seeks comment on whether there are regulatory gaps for custody issues in respect of payment service providers, stored valued facilities, virtual assets and tokenisations.
Also in focus is the treatment of international sub-custodians. They are currently treated as ‘custodians’ for Management Investment Scheme purposes, but not in other cases. And having multiple sub-custodians across the world subject to New Zealand law imposes a significant regulatory burden, particularly where the sub-custodian is in a jurisdiction where the New Zealand holdings are very small but unavoidable under applicable investment mandates. There are issues also in jurisdictions which do not recognise trusts when New Zealand law requires sub-custodians to hold assets on trust.
This is an opportunity to raise these unintended consequences and suggest that when New Zealand laws apply extra-territorially, they do so pragmatically and efficiently.
Next steps
This is an important consultation for any business involved in holding, controlling or arranging the holding of client assets. The direction of travel suggests the FMA is considering recommending a more coherent and more intensive custody framework, particularly where retail investors or emerging asset classes are involved.
If you would like advice on how the discussion paper may affect your business, or need help preparing your submissions, please get in touch with one of our experts.
