New Zealand's custody framework under review

The Financial Markets Authority - Te Mana Tātai Hokohoko (FMA) is seeking feedback on whether New Zealand’s law and practices relating to the custody of money and assets in financial markets is fit for purpose.

The latest in a series of “fit for purpose” regulatory reviews, the discussion paper, released on 23 June 2026, focuses on whether the current framework adequately addresses key risks associated with custody services in New Zealand. It is the most comprehensive review of custody regulation since the FMCA was introduced and is likely to shape the regulatory landscape over the next few years.

The paper seeks feedback on issues and risks across 18 questions but, importantly, stops short of proposing reform options or solutions at this stage.

The FMA published the paper in support of its regulatory priority of strengthening protection for assets held in custody, as introduced in its 2025/26 Financial Conduct Report. See our insights on the Financial Conduct Report here.

The paper says New Zealand’s custody regime is relatively light, but complex and fragmented, and has not kept pace with rapid growth in assets under management and increasingly sophisticated market structures. The FMA identifies emerging risks, including digital assets, cross-border activity and market concentration, as exposing gaps in the regime. The International Monetary Fund (IMF) has also noted these issues, particularly the absence of a licensing framework and limited supervisory tools.

 

KEY ISSUES AND RISKS

The paper identifies several key issues, including:

• Complexity driving uncertainty: Requirements for custody are spread across various provisions of the FMCA and associated regulations, making interpretation difficult, raising uncertainty and increasing compliance costs. Regulation and liability can sit with the business that has contracted with the client, rather than the outsourced custody provider, leading to confusion about who is responsible. The rules that apply to custody also depend on the legal form of the investment, meaning investors may have different protections or risks for the same economic exposure. The paper specifically contrasts retail managed investment scheme (MIS) investors, who benefit from independent custody, with direct platform investors, where there is no independence requirement and no platform licensing. This signals that the FMA sees a gap in retail platform custody.
• Lack of licensing: Acting as a custodian does not require a licence, meaning less information is available for supervision. Unlicensed entities are not required to complete annual regulatory returns. Because there is no licensing power, there is no ability to impose licence conditions or use licence-based tools such as censure, action plans, suspension or cancellation. This reduces the FMA’s options for influencing behaviour and enforcement. The benefits of an obligations-only regulatory model, including innovation, flexibility and lower compliance costs, depend on effective governance and strong enforcement mechanisms.
• Weaknesses in wholesale custody: Custody for wholesale clients is largely unregulated in New Zealand, with no requirement to hold assets on trust or in segregated accounts. Reliance on overseas custodians and layered sub-custodial arrangements can dilute oversight and limit the ability to verify assurances. Independence is also not required for client money or property services, retail custody, wholesale custody and certain other types of custody. This lack of independence reduces separation between asset holding and asset management, a core safeguard designed to protect investors.
• No minimum standards: There are no universal or standard entry conditions or regulator checks for custodians entering the market. There are also no financial resource or insurance obligations, and no assessment of financial resources through a licensing process. The failure of a large custodian could significantly impact clients, due to complex data, reconciliation and regulatory challenges. It could also delay access to assets, create difficulties reconciling records and cause uncertainty during transfer.
• Concentration risk building: A small number of providers hold a large proportion of assets, increasing the impact of operational or financial failure. This means disruptions could affect many investors at once and make transferring assets to alternative providers more difficult. Related services such as investment platforms, wrap platforms, fund administration and registry services play a significant role but have limited regulatory oversight. Operational errors, outages or cyber-attacks in these services could lead to delays in accessing assets, administrative errors and exposure of personal information.

The paper also highlights emerging issues in the treatment of money held for payment services and digital or virtual assets. These arrangements generally fall outside the custody regime, meaning there are no requirements for segregation, trust structures or other standard custody safeguards.

 

OUR VIEW

The FMA cannot itself reform the law - that sits with MBIE, Cabinet and ultimately Parliament – but it is clearly preparing the ground for reform recommendations, likely ahead of the IMF’s next review of New Zealand’s financial system (expected in 2027-28). The case for reform is being framed by reference to past failures, including Ross Asset Management, Kloogh, Halifax, Cryptopia and Dasset, and by comparison with more prescriptive overseas regimes such as the Australian Financial Services (AFS) regime and the UK Financial Conduct Authority’s (FCA) Client Assets Sourcebook (CASS).

While the discussion paper stops short of proposing specific measures, the direction of travel is clear: a more unified custody regime may emerge, potentially including a licensing framework for custodians alongside enhanced requirements for operational resilience, cyber security, financial resources and independence.

We expect the FMA to recommend expanding the regulatory perimeter to capture areas currently outside the regime, particularly wholesale custody, payment service providers and virtual assets. Any reforms in these areas are likely to intersect closely with MBIE’s ongoing work on payment services. Our insights on that work can be found here.

That said, the FMA’s recent monitoring provides a more balanced picture. Its finding of “no material weaknesses” in supervisor oversight supports the view that the MIS custody framework is functioning well. This creates a strong platform for retaining core elements of the current model, even if broader reforms are introduced.

The consultation represents a key opportunity for industry to shape the policy direction while the options are still being developed.

 

MAKING A SUBMISSION

The FMA is seeking feedback from anyone with an interest in custody of assets, including custodians (wholesale and retail), financial advice providers, discretionary investment management service providers, brokers and investment managers, MIS managers and supervisors, investors, consumers and industry groups, fintechs, legal advisers, academics and other interested parties.

Submissions can be made via the FMA website. Consultation is due to close at 5pm on 27 July 2026. The FMA also intends to hold an in-person industry workshop on 19 August 2026 to explore these issues in more detail.

Please contact your usual DLA Piper adviser if you have any questions or would like assistance preparing a submission.