Marvin Turner and Dale McCann of Comerica Bank explain why choosing a custodian bank when setting up a captive is one step that should not be taken for granted
Marvin Turner and Dale McCann of Comerica Bank explain why choosing a custodian bank when setting up a captive is one step that should not be taken for granted
Marvin Turner,
vice president and senior relationship manager,
international trust,
Comerica Bank
Dale McCann,
relationship manager,
Comerica Bank
After months of feasibility studies, negotiations with captive managers, fronting companies, actuaries and investment managers, you are finally ready to fund your captive and start writing policies.
Now you must choose a bank to handle all your financial transactions. Selecting a bank to act as custodian, trustee or letter of credit issuer may be the last step when setting up a captive insurance company, but it is one step that should not be taken for granted.
While it may be tempting to make a quick selection, finding the right custodian bank can significantly affect the ease of operation and profitability of the captive and should not be made without proper due diligence. The criteria listed in this article on selecting a custodian bank has been compiled to help you become familiar with key factors that may save precious time, money, and energy.
What is a custodian bank?
A custodian bank is a financial institution that may perform tasks including the safekeeping of captive assets, either onshore or offshore; securities trade settlements; and accurate, timely reporting of all captive financial transactions, including movement of cash and securities.
A custodian bank may also offer investment management services, as well as trust services, including Regulation 114 trusts.
A tri-party trust agreement between a captive, a fronting insurance company and the bank trustee is typically required.
Custody accounts versus trust accounts
When a custodian bank is also designated as a trustee, the bank assumes fiduciary responsibility for the assets of the trust. The captive may choose to utilise a reinsurance trust for purposes of collateral with its fronting insurer.
Under a reinsurance trust agreement, the bank serves as trustee and is the gatekeeper on behalf of the ceding company or beneficiary, thereby limiting the access to the account by the captive or the grantor.
Only banks chartered in the US may act as trustee for a New York State Regulation 114 trust, which is a common arrangement utilised by many captives.
What is the criteria for making the right choice?
Armed with some knowledge of the role and responsibilities of a custodian bank, the next step is to compare and evaluate potential providers to make the best choice for your captive insurance programme.
Onshore versus offshore
You may first want to determine where the custodian bank is based (for example, onshore or offshore), and which alternative is best for your captive programme.
Offshore captives often use offshore banks or offshore branches of US banks.
Keep in mind that no matter where the custodian bank is based, US assets are typically held in the US in book-entry form at US depositories. Time zone differences and hours of operation may also factor into your decision.
Target market relative to your size
How large is the custodian bank? What is its target market? Are these factors consistent with the size and needs of your captive? It is important to know where you fit in the client base of a prospective custodian bank.
For example, many custodian banks may direct clients with smaller assets—typically less than $50 million—into a service model that does not provide the service levels and flexibility that your captive may require.
Experience and commitment
This may be your most important consideration. You’ve gotten to this point utilising the skills of professionals committed to the captive industry. You don’t want to jeopardise all the work involved to set up your captive by choosing a custodian bank that is not familiar with captive industry laws, rules and regulations.
A custodian bank with a staff dedicated to working with captive insurance clients will likely speak your language and understand your captive’s needs. It may be important to know if the custodian bank is active with captive industry groups and regularly attends captive industry conferences and seminars.
Reporting needs
Insurance companies have specific reporting needs. Make sure your custodian bank is aware of those needs and is capable of meeting all your compliance requirements. Ask if the custodian bank provides:
Impact of FATCA
Much has been written about this US regulatory hurdle, the Foreign Account Tax Compliance Act (FATCA).
This US federal legislation, passed in 2010, requires that non-US financial institutions report assets of and identify foreign entities with indicia of US person status, such as US residency, place of birth, and so on.
Non-US captives must identify beneficial owners of Internal Revenue Service (IRS) Form W-8BEN-E.
Additionally, if a non-US captive qualifies as a “foreign financial institution” as defined by the IRS and holds US securities or receives other US source income of any kind, then special US tax reporting is required.
You want to confirm that your custodian can comply with the reporting requirements under FATCA.
Investment management
Does your custodian offer investment management services? This is a question you might ask to either lower your expenses through a bundled service or to consolidate your vendor/service provider base.
Be sure that you know what your custodian bank can and cannot do in terms of investment management. Will the bank provide the services your programme needs, or do they require you to hire a third-party investment manager?
Global custody
If there is any chance the captive may invest in foreign securities, it is vital that the custodian bank have access to global settlement. This can be done via a proprietary in-house network of foreign banks or through a contracted global custodian.
Expect to pay additional fees for this service. Be sure that you understand the custodian bank’s reporting capabilities, including multi-currency accounting or local currency accounting.
Fees
Once the field of bank custodians is somewhat narrowed, it is time to evaluate fees. Custodian banks are usually paid on a market value-based fee schedule, which may also include transaction fees and an overall minimum.
It is worth the time to compare fee schedules, as they may vary widely and directly affect the profitability of the captive programme. Pay attention to minimums, what is included in the base fees, and confirm if there are charges for additional services. The least costly is not always the best value.
Selecting a custodian
As you can see, selecting the right custodian bank is a critical decision and should not be taken lightly. Your current banking relationship may not be able to meet the needs of the captive. An effective working relationship with your custodian bank is critical to the ongoing operations of your captive. Custodians come in many shapes and sizes, and you want to find one that will be a valued partner in the operation of your captive.
