A few months ago, in The low-down on the retail client money reforms for OTC derivatives, we looked at client money reforms which had just been passed into law. Last week, the Australian Securities & Investments Commission (ASIC) finalised its Client Money Reporting Rules (the rules) which will come into force from 4 April 2018. These rules set out the specific record-keeping, reconciliation and reporting requirements for Australian financial services (AFS) licensees with respect to over-the-counter (OTC) derivative client money.[1]
By Dr Drew Donnelly, Compliance Quarter.
In today’s update we provide a quick summary of the finalised rules and highlight some key amendments introduced by ASIC in response to sector consultation.
Recap on the client money reforms
As we set out in our previous article, the client money reforms were introduced in order to fix an inconsistency in the obligations towards the different types of client of an AFS licensee. For most financial products, AFS licensees had special obligations to protect the interests of retail clients (e.g. an obligation to hold client money in a trust account), but this was not the case for over-the-counter (OTC) derivatives.
This changed with the Treasury Laws Amendment (2016 Measures No. 1) Act 2017. This amendment Act, among other things, gave ASIC the power to issue client money reporting and reconciliation rules in order to enforce the new limitations on the use of client money.
The client money rules
The new rules hold that:
- a licensee must keep accurate records of the amount of reportable client money it is required to hold in a client money account, for each client and on an aggregate basis (rule 2.1.1);
- a licensee must perform daily and monthly reconciliations of the amount of reportable client money that it is supposed to hold in a client money account against the amount of reportable client money that is actually held in that account (rules 2.2.1 and 2.2.2);
- a licensee must provide ASIC with a written report if it has failed to carry out a reconciliation as required, or a reconciliation reveals a difference between the amount of client money supposed to be held and the amount of money that is actually held (rule 3.1.1);
- directors (of the AFS licensee) must make an annual declaration of compliance with the rules and, the AFS licensee must be externally audited according to the requirements of a prescribed form (rule 3.1.3);
- an AFS licensee must establish policies and procedures designed to ensure compliance with the rules (rule 4.1.1);
- failure to comply with the rules has a maximum penalty of $1,000,000 (rule 1.1.4).
Response to consultation
In July, ASIC consulted on the draft rules, and in response it made some amendments (now incorporated into the finalised rules). Key changes include:
- rule 2.1.2 was amended to require AFS licensees to comply with requests for records within five business days, rather than two;
- the daily and monthly reconciliation requirements in subrules 2.2.1(1) and 2.2.2(1) were amended to require licensees to reconcile the amount of reportable client money held as at a time determined by the licensee, rather than by 7pm, Sydney time;
- subrule 2.2.1(3) was amended so that daily reconciliations must be completed within three business days from the end of the business day to which the reconciliation relates, rather than within 24 hours;
- subrule 3.1.2 was amended so that the time by which a licensee is required to lodge an auditor’s report with ASIC was extended from three months to four months after the end of the financial year.
For more information see the finalised rules and associated documents at http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-338mr-asics-client-money-reporting-rules-finalised/.
[1] A derivative is a financial product which derives its value from an underlying asset (examples of such assets include a stock or a mortgage). Common examples include swaps and options. An OTC derivative is a derivative traded directly between two parties, rather than through a formal exchange.
