The first question is: can National Australia and ANZ, its predecessor as custodian for the Astarra Strategic Fund, confirm the existence of the fund’s assets? Knowing where an asset is is the central obligation of the custodian.

The second question is: can we count on the custody industry to account for the existence of the rest of the nation’s savings and investments?

Can we count on auditors to deliver the same security? Like an unmanned fruit stall by the side of a country road, the Australian financial system is in large degree honour-based. We rely on disclosure.

Custody lies at the core of the financial system. The integrity of the system comes with the trust that an independent party, a custodian, knows where your assets are at a given point in time.

Yesterday, BusinessDay revealed the Australian Securities and Investments Commission had put an urgent interim stop order on Trio Capital, formerly known as Astarra Capital, requiring the funds manager to remove its product disclosure statements for its $1 billion in

managed funds.

Like its peers, Astarra does the usual marketing jig, paying commissions to financial planners who slot their clients’ savings into its products. The best performing fund in the Astarra stable is the Astarra Strategic Fund (formerly dubbed Alpha Strategic). Given its spectacular performance and Astarra’s glowing five-star rating from the ”independent” asset consultant Morningstar, the fund has grown quickly.

The money in the fund then wends its way to the British Virgin Islands via Hong Kong, whereupon it is – according to the PDS – invested in hedge funds. Not directly invested, mind you; rather, the fund enters into deferred purchase agreements (DPAs) with a BVI entity called EMA International (whose directors and beneficiaries are, in typical tax haven form, undisclosed).

When BusinessDay asked Astarra earlier this year where its funds were invested, it did not get a clear answer. When the same question was posed to ANZ, the custodian whose name was disclosed on the PDS, there was no clear answer. It soon emerged that ANZ was not custodian, although at first it thought it was. The Astarra business had been transferred to National Australia, which also appeared not to realise this at first.

Later, National Australia Trustees confirmed that it was the custodian and, yes, it could vouch for the existence of the assets.

Now it appears that the information which NAT provided was itself provided by Astarra operatives and NAT is unable to confirm – at this point at least – the existence of the assets. That’s not to say they have disappeared, it merely suggests that NAT has not checked.

Custody is like flying a jumbo jet: it’s all automated and not much ever goes wrong, but when it does, a lot of people can get hurt.

The duty of the custodian lies not with the manager but with the beneficiaries of the trust; the investors, that is. If things were to go awry, there is no doubt that NAT would contend that it relied on directions from the manager – perhaps even on a subcontract with Standard Chartered, which is custodian of the EMA funds.

For its part, Standard Chartered has declined to comment.

Custody is a big money game with wafer-thin profits in the order of two basis points. So its operators – the largest of which are State Street, JP Morgan and Bank of New York with a combined $30 trillion under their purview – use it as a loss leader, making their cream via stock lending and foreign exchange transactions.

Most of the blow-ups in the financial services world have been operational rather than the result of credit risk.

With credit risk, the liability of a financial institution is capped. Operational risk is far more deadly. Look no further than the collapse of Barings Bank in Britain. A more contemporary instance is Centro, whose auditors and directors failed to avail the market of a $1.5 billion black hole in the accounts which led to the death spiral in the share price during the subprime meltdown two years ago.

Independent oversight is critical to the proper function of corporations. The subprime meltdown and the ensuing financial crisis have, as in every business cycle, thrown up faults in the system and in its guardians. The auditors have put on a demonstrably poor show, vide Allco, Centro, Babcock and myriad others. The responsible entities (REs) have proven as independent as the executives on the other side of the Chinese wall. Look no further than the REs of the managed investment scheme promoters such as Great Southern and Timbercorp, whose fiduciaries are as broke as the schemes themselves.

Custody, where the big dollars are safeguarded, has been the one remaining refuge of true independence. The system can hardly do with a custodial blow-up.

The custodian is the equivalent of the vending machine. The machine protects the drinks (assets). You can only get the can of drink out (the asset) if you put in something valuable (cash).

Custodians look after the contents of trusts. They essentially are the machine and they are meant to be unbreakable because they have trillions inside – not just a few cans of soft drink.

They can ill afford to leave the key in the machine. And they should know what is inside.