At its simplest, an EIS custodian & administrator is a FCA regulated financial institution that holds customers assets on behalf of the fund manager for the beneficial owner, the investor. Thus, the main responsibility of the Custodian is to physically hold the assets, whether in paper or nominee form, client money, account for them, report these holdings to the fund manager & investor and to execute the required transactions.
In effect, the custodian is operating the fund on the fund manager’s behalf and under its instruction. When deciding which custodian is right for you and your fund; we recommend you consider the following before making your selection:
Do they hold the appropriate permissions from the Financial Conduct Authority (FCA)? Confirm that the custodian can hold client money; that they are authorised to carry out this regulated activity; they are able to safeguard and administrate the assets plus have the capability to transact your instructions? In addition, ask how they have found the implementation of the Senior Managers and Certification Regime?
Custodian financial stability
Is the custodian a stable and secure company? This assessment will be dependent upon you asking for and reviewing the accounts of the custodian, ascertaining whether any financial updates have been provided to the market and appraising the composition of the board including their plans. As part of your due diligence always review their Company House entry and remember that the accounts provide a picture of what happened in the past but can, also, give a good indication for the future. The review needs to be undertaken attentively as the demise of a major EIS custodian in 2019 meant the custodian’s fund managers and related investors not having full access to their monies and assets, in many cases, for well over a year.
As a result of the Prudential Regime that becomes effective on 1st January 2022, the regulated capital requirements for custodians is undergoing some material changes over the next several years. Ensure your preferred custodian can demonstrate awareness of these changes.
In addition, as you are placing your complete trust in your custodian to look after the assets. You must understand their reputation within the market and including the level of customer service. For example, find out whether they have received outside recognition for their offering, this may include awards for customer service and how well known they are within the sector. Moreover, a good indication of the future service you are likely to receive is to ask investment managers that utilise that custodian already for their thoughts on the expertise and competencies of that provider. A general theme will usually develop on the capabilities and its reputation.
Do they offer the services you require? Most EIS / SEIS investments are in unlisted securities, however, some can be AIM listed companies. Does your custodian have the capability to deal with listed securities including placings and those companies that may graduate to the AIM? If your investments are likely to be on or progress onto the AIM then you need to select a custodian that has the capability to deal with this eventuality. Even, if they profess this capability then ascertain whether a sub-custodian is used for listed stock. If this is the case, then you will need to ask the same questions about the sub-custodian as you would have of the custodian.
Can the custodian cope with international transactions? EIS qualifying companies are only required to have a permanent UK establishment so may have offices in other countries or a prospective purchase may be overseas based meaning that transactions may have to be conducted in a foreign currency. Verify whether your custodian has the capability to deal with international deals.
Are the proposed fees charged transparent? Not all custodians explain their charges in detail. Compare pricing from different providers to understand the different services that are included, and which are additional services. More detailed pricing structures put you in better control to avoid surprises later. Tip: request example invoices that current clients receive.
Value for money
Are the proposed services value for money? Lowest cost does not necessarily equate to best value. Lower cost providers tend to have more manual driven processes, higher use of email and less advanced reporting services that invariably result in more of the fund managers time being drawn into administrative activities.
- Is the administration fee inclusive of all administrative activities or do you have to pay more for an investor bank transfer, an ad-hoc valuation or a pay out by cheque? The initial charge may seem lower but may be higher over time depending upon how you operate your fund. Does the administrative fee include fund and investor reporting and what is the sophistication of this reporting? This is crucial for your management of the fund and investor relations.
- When reviewing your proposed relationship do you want to be a big client for a small custodian or vice-versa? Each has advantages but always think if the fund gains more subscriptions then you initially hoped does the custodian have the capability to deal with these increased flows and additional work that this could generate?
Is the custodian’s technology compatible? Each custodian has its own technology. It is important to seek a custodian that offers flexible solutions that will help you run your operation more efficiently or better. Make sure you choose a provider that helps your business operate and grow. This includes the sophistication of the reporting services to support investors, fund managers and the introducers, including IFAs & wealth managers, which should include high quality data & reporting with the ability for them to produce their own documents and reports. The more investors, advisors and the fund manager can self-serve access to reporting the greater saving you will make in customer service time & monies, which ultimately will increase your viability and profitability. You may wish as part of your due diligence to ascertain whether they employ or have quality systems and this includes understanding whether the database is administration driven; does the data warehouse reporting support your business intelligence needs and how sophisticated & understandable is the visualisation of this information. You should, also, ask whether reports are sent by post or email, or are posted to a portal, and whether, the information is available via dashboards, and establish whether different methods of transmission have additional costs.
You must understand how well protected is your data? Determine whether the custodian has been recognised by an independent outside agency, such as Cyber Essentials, with their commitment to cyber security. In addition, does the custodian understand their requirements under GDPR and, in the case of a data breach, who is responsible to report this to the Information Commissioner’s Office (ICO)?
Environmental, Social & Governance (ESG) Criteria
For many fund managers having an ESG investment strategy is an increasingly popular way for them to evaluate companies in which they might want to invest. Moreover, for many investors a fund manager not having an ESG criteria or not able to show commitment to this philosophy may result in the fund manager not receiving from monies from these individuals. To help attract subscriptions from potential investors always ask the Custodian what their ESG policy is and, then ask them how they demonstrate this commitment.
Nothing is permanent. Remember to insist on an annual review to evaluate the past year’s performance with the custodian relationship manager. While it can be a hassle to change custodian if the relationship does not work ensure that the contract gives you the capability to leave within a reasonable period without penalties.
Your selection of a custodian is an extremely important decision and their sustainably and capabilities will reflect upon you. It will influence your reputation within the market including the perception of wealth managers, your investors and potential clients going forward. The selection, therefore, of an appropriate and financially stable custodian becomes a significant and major decision for any fund manager.
Paul Richardson is the Sale Director – Custody at Mainspring Fund Services with responsibility for the sales & business development of their EIS / SEIS / BR / BIR custodian & administration offering. Prior to working for Mainspring Fund Services Paul was at The Share Centre, RBS, Durlacher, Redmayne Bentley and other financial institutions for over 20 years and has, also, been an officer in the Royal Air Force. He holds the EIS Advisors Diploma and has been a finalist twice in the EISA awards and is also a Judge for the UK Growth Investor Awards.