The Australian Parliament has this week passed proposed reforms to the client money rules relating to retail derivatives into law. The new rules are likely to come into force in the first half of 2018.
Under the new rules AFS Licensees will be required to hold retail derivative client money on Trust. A rule that already applies to the vast majority of financial products and services under Australia’s client money regime. The expectation is that this will give clients better protection as client money that is held on trust can be returned to clients if the licensee becomes insolvent, rather than being paid to the licensee’s creditors. The new rules do not apply to wholesale client money.
The new rules also give ASIC the ability to write client money reporting and reconciliation rules that will apply industry standards for the handling of client money, although ASIC must consult with the industry when doing so.
The news that the Bill has passed has been welcomed by ASIC, with ASIC Commissioner Cathie Armour commenting, “The amendments to the client money regime made in the Bill have strengthened the protection of client money that is provided to retail derivative clients. Doing so will help to increase investor confidence in the Australian financial system”
Many larger brokerage firms are in favour of reforms to the current client money rules and will also welcome the passing of the Bill. These firms have been vocal in their support of the Bill throughout the consultation process. Some of these firms have voluntarily introduced the segregation of client funds and, in the belief that it affords their clients greater protection, are already holding retail derivative client money on Trust.
The requirement that client money be held on Trust removes the current ability for AFS Licensees such as STP brokers and smaller less sophisticated and less capitalised brokers to withdraw client money, provided by the clients in relation to retail OTC derivatives, and use it for a ‘wide range of purposes’ including as working capital. The new rules will therefore impact the way that such firms operate. It is intended that the 12-month transition period will allow time for these types of businesses to adapt their current business model to meet the requirements of the new regime.
The Treasury Laws Amendment (Measures No. 1) Bill 2016, the fifth schedule of which amends the client money rules, must now receive Royal Assent before becoming an Act of Parliament. The Act will commence one year from the date of receiving Royal Assent.
This article is only intended to be an overview of the new client money rules. Please contact us if you would like further information about the new rules or advice about your obligations, or the obligations owed to you, under the new regime.