After 21 years, State Street and MLC part ways – NAB finally has a laugh

Australia’s largest and longest-standing custody relationship, a relationship which launched the concept of master custody in Australia, has finally, belatedly, come to an end. State Street and MLC have parted ways.

Like a divorce after a long marriage, the writing was on the wall for everyone to see. National Australia Bank, which now has the largest custodian in Australia – NAB Custody – acquired MLC in 2000. NAB Custody has made several attempts to wrest the business from State Street, but only in the past 18 months has MLC been prepared to consider the move, now after 21 years. At almost $100 billion under management, including cross investments (where MLC invests in its own products), the contract is twice the size of the previous largest in Australia -that awarded early this month by the Future Fund to Northern Trust. The Northern Trust appointment subsequently drew tabloid press fire and has prompted nationalistic questioning as to why an Australia custodian was not awarded the contract. NAB was the only Australian custodian on the five-company Future Fund short list. The MLC win, however, will put NAB Custody as the clear market leader in size in Australia, having raced neck and neck with JP Morgan for that mantle over the past two years. At State Street, David Travers, the managing director, is proud that the custodian kept the relationship going for just over seven years after MLC had changed hands. “NCS (NAB Custody) is a very strong competitor and a leading player in the market,” he said yesterday. “So, it’s a testament to our people, our strategy and our investment in the best platforms available that we maintained the relationship for as long as we did. Our focus now is to continue to leverage the $US1.2 billion a year that State Street invests in technological development.” There would be no job losses at State Street, he said, because of the continued growth in the business and whatever natural attrition occurred. State Street is currently transitioning the $3 billion in Tower Group assets to its care and is rumoured to be going to get the $5 billion in custody up for tender by NSW Workcover. “The sales team is as busy as it’s ever been,” he said. “There are lots of new outsourcing opportunities and there are also some people who are looking to shift providers. None of our customers are out to tender at the moment.” At NAB, the MLC decision represents several years of hard work. The custodian was thwarted at least twice in the past seven years in its attempts to win over MLC. At the time, the story goes, MLC was keen to show the NAB executives that they had independence over the business and senior NAB executives were not prepared to force the subsidiary to use its own backoffice services. That cost NAB an estimated $25 million a year in fees, which went to State Street rather than redirected within the bank. Patrick Liddy, NAB Custody’s director of marketing, said that for the past 18 months NAB had a team of up to 70 people providing a “shadow custody” service to MLC in order to show the multi-manager it could transition the work. “It was the biggest test that we’ve ever done, probably that anyone has ever done in Australia,” Liddy said. “We tested all aspects of all trades and made sure that everything would function perfectly.” The transition, however, is still likely to take several months. MLC was State Street’s third client in Australia, signed up in 1986 after the former life office was acquired by Lend Lease and transformed into Australia’s first multi-manager, with advice from the former Frank Russell. State Street’s two earlier clients, signed up a year earlier, had been serviced from offshore. It was MLC which prompted State Street to open an Australian office and this, in turn, prompted super funds to seriously consider appointing master custodians as they headed down the specialist management route. Other custodians, such as JP Morgan, followed and launched a new range of investment administration and custody services in Australia. Steve Tucker, MLC chief executive, said the partnership with State Street had been extremely successful. “We have received excellent service from State Street over the years and wish the business continued success in the future,” he said. Interestingly, RBC Dexia Investor Services will continue to provide custody for MLC’s MasterKey Custom platform, which is also a relationship which pre-dates the NAB takeover.