What is Client Money?
Part 7.8 of the Corporations Act 2001 (“Corporations Act“) defines client money as money which is paid to an AFS Licensee in connection with:
- a financial service that has been, or will be, provided to a client; or
- a financial product held by a client.
The money must be paid by the client or a person acting on behalf of the client.
Client money does not include money paid by a client:
- as remuneration to the AFS Licensee;
- as reimbursement to the AFSL Licensee for expenses incurred on the client’s behalf;
- to discharge a liability incurred by the AFS Licensee for acquiring a financial product for the client;
- to acquire an increased interest in a financial product and the AFS Licensee issues the product.
Which AFS Licensees do the Obligations Apply to?
The client money obligations apply to AFS Licensees that deal with retail and wholesale clients and includes both intermediaries and product providers. AFS Licensees such as:
- issuers of registered and unregistered managed investment schemes;
- operators of non-cash payment facilities;
- issuers of derivatives;
- corporate advisory firms;
- insurance brokers and issuers.
There are specific additional rules for issuers of retail OTC derivatives. For further information, please see our dedicated page.
What are your Obligations?
There are a number of obligations and requirements when dealing with client money. These include:
- the requirement to pay the money into a dedicated client money account. The account must be:
- held with an Australian Authorised Deposit-taking Institution, an approved foreign bank or a cash management account; and
- operated and designated as a trust account.
- only certain money can be paid into the client money account, this includes:
- client money – paid by the client, or on behalf of the client for the benefit of the client;
- interest on the amount in the account;
- interest made on any investments made in accordance with the Corporations Act.
- Withdrawing or moving money from a client money account can only be done in certain circumstances:
- upon the client’s instruction;
- to pay brokerage charges;
- to pay money which is owed to the AFS Licensee;
- to pay money to an insurer in connection with an insurance contract; and
- to make any other payment with is authorised by law.
What Happens in the Event of a Breach?
Breaches of the client money rules can include:
- failure to operate the client money account appropriately;
- making investments with client money which are not permissible under the Corporations Act;
- making payments from the client money account which are unauthorised.
A breach of the client money rules is likely to be significant and therefore AFS Licensees will need to consider their obligation to report the breach to ASIC.
The provisions of the Corporations Act which deal with client money are civil penalty provisions meaning ASIC can request the court impose civil penalties, impose additional licence conditions, publish information on its website regarding the breach or require the AFS Licensee to take part in a client remediation program.