From Wednesday 4 April 2018, Australian Financial Services (AFS) licensees which hold derivative retail client money will be subject to new record-keeping, reconciliation and reporting rules. Amendments to the Corporations Act 2001 (Corporations Act), operational from the same date, will prevent AFS licensees from using client money for a range of purposes.
What does the law currently allow?
Currently, client money or property held by an AFS licensee in connection with dealing in a derivative may be used for a number of purposes, including to meet obligations incurred by the licensee connected with dealings on behalf of other clients. This is seen as a risk to retail client money, especially if the AFS licensee experiences an insolvency event.
From 4 April 2018 the reforms under the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 will prevent usage of derivative retail client money for the purposes previously permitted under the Corporations Act.
ASIC has also made the ASIC Client Money Reporting Rules 2017 by legislative instrument which enforce derivative retail client money reporting and reconciliation requirements and set penalties for breach.
What is “derivative retail client money”?
The amendments will insert a definition of derivative retail client money into section 761A of the Corporations Act. Client money will be derivative retail client money if it is paid to an AFS licensee in connection with a derivative by a retail client.
What do ASIC’s rules do?
ASIC’s rules apply to Reportable Client Money, which is derivative retail client money held by an AFS licensee in relation to derivatives not traded on a licensed domestic exchange.
Money related to derivatives which are traded on a domestic exchange are carved-out because participants in those exchanges are already subject to reporting and reconciliation rules.
An AFS licensee will not be required to comply with the rules if all the Reportable Client Money it receives is reconciled under ASIC’s Market Integrity Rules for the ASX 24 Market, FEX Market and Futures Markets.
AFS licensees will be required to hold records of the amount of Reportable Client money received from, on behalf of, or for the benefit of a client, and which is required to be held in a client money account under Division 2, Part 7.8 Corporations Act.
A record of the total amount of client money for all clients must also be kept.
If a client (in respect of that client’s records) or ASIC requests copies of the records, the AFS licensee must comply within 5 business days.
The records must be kept for at least 7 years.
AFS licensees will be required to reconcile the amount of client money held for each client, and in total, with the records of the amounts of client money held. Reconciliations must be carried out daily and monthly.
The AFS licensee will also be required to nominate, in writing, the time and timezone at which the reconciliations will be carried out each day. Any changes to the reconciliation time must be notified to ASIC prior to the change.
Records of reconciliations must be held for at least 7 years.
AFS licensees already subject to ASIC Market Integrity Rules for the ASX 24 Market, FEX Market and Futures Markets are not required to carry out reconciliations of money already reconciled under the market integrity rules.
If an AFS licensee fails to carry out a reconciliation, or a reconciliation shows a difference between the amount of reportable client money held and the amount recorded, the licensee must report to ASIC in writing within 5 business days.
Within 4 calendar months of the end of the financial year, the licensee must provide to ASIC a director’s declaration of compliance (or non-compliance) with the rules and an external auditors report on whether the licensee’s systems enable it to comply with the rules.
Policies and procedures
AFS licensees with obligations under the Client Money Reporting Rules are required to implement and keep up-to-date policies and procedures to ensure compliance with the Rules.
Maximum penalties for breaches of the rules have been set by ASIC.
|Rule||Maximum penalty for breach|
|Complying with a request for records within 5 business days|
|Carrying out daily and monthly reconciliations|
|Nominating a reconciliation time or to inform ASIC of a change||$1,000,000|
|Provision of annual declarations and audit report|
|Implementing and updating policies and procedures|