02.27 – Custodial Institution

A Custodial Institution is an institution that holds financial assets for the account of others as a substantial portion of its business in the UK.

A substantial proportion in this context means where 20 percent or greater of the entity’s gross income from the shorter of its last three accounting periods, or the period since it commenced business, arises from the holding of assets for the benefit of others and from related financial services.

An entity with no operating history as of the date of the determination is considered to hold financial assets for the account of others as a substantial portion of its business if the entity expects to meet the gross income threshold based on its anticipated functions, assets, and employees, with due consideration given to any purpose or functions for which the entity is licensed or regulated (including those of any predecessor).

Related financial services are any ancillary service directly related to the holding of assets by the institution on behalf of others and includes

  • custody, account maintenance and transfer fees
  • execution and pricing commission and fees from securities transactions;
  • income earned from extending credit to customers;
  • income earned from contracts for differences and on the bid-ask spread of financial assets; and
  • fees for providing financial advice, clearance and settlement services.

Such institutions could include brokers, custodial banks, Trust companies, clearing organisations and nominees. Insurance brokers do not hold assets on behalf of clients and thus should not fall within the scope of this provision.

An execution only broker that simply executes trading instructions, or receives and transmit such instructions to another executing broker will not hold assets for the account of others should not fall to be custodial institutions (although it is possible that they could be an investment entity – see 2.32).