The reality of the new Client Money regime for retail derivatives sank in further this week with the release of the ASIC Client Money Consultation Paper. The paper sets out how ASIC intends to manage the new rules and what Australian Financial Services Licensees (“Licensees”) will need to do to comply with them. These rules will come into force on 4 April 2018, which is a mere nine months away.
For those that haven’t kept up to date with developments to the Client Money regime, the Client Money reforms have come about due to the passing by the Australian Parliament of the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 on 27 March 2017.
The proposed rules suggest that to monitor industry compliance, ASIC will rely heavily on the accurate self-reporting of Client Money held and used by Licensees. We don’t anticipate there will be many changes made to the proposed rules before they are finalised and suggest those impacted begin to make preparations to comply with the rules as outlined in the Consultation Paper, with expectations for at most minor tweaks when they are finalised into a Regulatory Guide.
What Should you do to Prepare?
In anticipation of the rules coming into effect, Licensees will need to do a number of things to prepare their businesses. This includes:
- Determine which of your clients are retail clients and which clients are wholesale (if your firm makes any distinction) and clearly differentiate these categories. This should include ensuring you have appropriate wholesale and sophisticated investor documentation in your systems to meet the requirements of the Corporations Act 2001 (“Act”);
- Update your PDS and Account Terms/Client Agreement to reflect how you will use Client Money;
- Update your company website and any other marketing documents (including any customer service FAQs and scripts) to reflect the new rules for use of Client Money;
- Request the return of funds back from any hedge counter-parties or other investments where those funds are Client Money, to ensure the recorded balance from at least a few days before matches; and
- Develop policy and processes around the new regulation requirements,
- Train your employees in the new requirements; and
- Run tests of the processes to ensure you are ready to launch by April 2018.
What is to Come?
Industry figures have predicted a change in the financial market landscape as the Client Money rules come into force.
Some brokers may move towards a “sophisticated” investor model. Funds received from clients who meet the wholesale/sophisticated investor test are excluded from the new Client Money rules, meaning that it can be used by the broker to hedge their positions. Sophisticated investors are also excluded from a raft of other regulatory requirements such as those in Regulatory Guide 227, the first being qualifying clients for their understanding of the products, as well as provision of disclosure documentation and recourse to the Financial Ombudsman Service Australia.
There were members of the financial services industry who raised a concern that the new rules would disproportionately affect small brokers whose clients were predominantly retail, and who would therefore see the capital available to them to use to mitigate against market risk reduced dramatically. The industry will be watching closely to see whether this foreshadowing proves accurate and brokers close down or sell their businesses due to a lack of available capital.
What Happens Next?
Stage one of the consultation process commenced on 11 July 2017 with the release of the ASIC consultation paper and draft ASIC Client Money Reporting Rules 2017. The consultation will close for comments or submissions on 8 August 2017. ASIC intends to publish a feedback report based on the submissions during October 2017, and the ASIC Client Money Reporting Rules are to be finalised shortly thereafter. The ASIC Client Money Reporting Rules 2017 will commence on the 4 April 2018.
What are the Proposed Reporting Requirements?
ASIC has proposed a number of reconciliation and reporting requirements that must be performed by Licensees on a daily, monthly and annual basis.
The proposed reporting and reconciliation rules include the following:
- A Licensee must keep accurate records of the amount of Reportable Client Money it has received from, on behalf of, or for the benefit of a person, and must retain these records for a minimum of seven (7) years from the date the record is made.
- A Licensee must keep accurate records of the amount of Reportable Client Money it has received from, on behalf of, or for the benefit of all persons.
- Daily Reconciliations: By 7pm each business day the Licensee must perform a reconciliation for the previous business day, and make a record of the amount of all Reportable Client Money;
- Held in a Client Money account for each person; and the amount of Client Money the Licensee recorded as having been received from, on behalf of, or for the benefit of each person; and
- Held in a Client Money account for all persons; and the total amount of Reportable Client Money it has received from, on behalf of or for the benefit of all persons.
- Monthly Reconciliations: A Licensee must perform a reconciliation as at 7pm on the last business day of each calendar month of the amount of Reportable Client Money:
- Held in a Client Money account for each person and the amount of Client Money the Licensee has recorded as having been received from, on behalf of, or for the benefit of a person; and
- Held in a Client Money account for all persons and the total amount of Reportable Client Money the Licensee has recorded as having been received from, on behalf of, or for the benefit of all persons.
A written record of the completed monthly reconciliation must be provided to ASIC within 10 business days of the end of the calendar month to which the reconciliation relates.
- Annual Director and Auditor declarations: Within 3 calendar months after the end of each financial year (for each year after 1 July 2018) a Licensee must submit to ASIC:
- A directors’ declaration (made in accordance with a resolution of the directors) that states whether, in the directors’ opinion the licensee has complied with the Client Money reporting rules. How this will be submitted has not been discussed in the Consultation Paper.; and
- An external audit report that states whether, in the auditor’s opinion the licensee has maintained suitably designed and effective internal controls and systems to comply with the Client Money reporting rules. It has not been stated at this stage whether this will form another question in the FS70/FS71 forms which are already submitted to ASIC by licensees each year, or whether they will develop another form and/or require allow the same auditor to perform this function.
The maximum penalty for a failure to comply with any of the reporting requirements is AUD$1,000,000.
Self-Reporting of Non-Compliance
ASIC have always been clear that they distinguish between AFSL breaches that are discovered by ASIC, and those that are self-reported to the regulator by the Licensee. ASIC take a far more conciliatory approach to the latter and it is always best practice to investigate any suspected licence breaches and report these promptly to ASIC. We don’t anticipate ASIC’s approach being any different in the Client Money arena and would caution Licensees against taking a relaxed approach to any breach of reporting or reconciliation requirements.
If the licensee becomes aware of a failure to comply with the Client Money requirements the Licensee must, within 5 business days, submit a written report to ASIC detailing the breach. These circumstances include:
- Where a licensee fails to perform a required reconciliation;
- Where there is a discrepancy in the reconciliation between the Reportable Client Money held for an individual and the amount recorded as received from, on behalf of or to the benefit of that individual; or
- Where there is a discrepancy in the reconciliation between the total amount of Reportable Client Money held for all persons and the amount recorded as received from, on behalf of or to the benefit of all persons.
We will be sending out regular reminders over the next nine months to help you to prepare.
If you have any questions about the new Client Money rules or would like our assistance in preparing your business please contact us.
Victoria works primarily with the legal services team at Sophie Grace Legal and assists in the drafting and review of legal documentation for participants in the financial services industry. Victoria also supports the Compliance Consultants in the provision of AFSL, ACL and on-going compliance services to clients. Victoria provides advice and legal services to clients and assists with the preparation of legal documentation, negotiation and advocacy on behalf of clients. Victoria also assists in implementing ongoing compliance support and the preparation of AFSL and ACL applications and variations. Victoria is admitted as a Barrister and Solicitor in New Zealand and as a Solicitor in New South Wales.