Australia Moves into Line Over Client Funds

The Australian government has announced it is proceeding
with reforms regarding the use of client funds by OTC derivatives brokers. The
move will bring the country into line with other jurisdictions such as the US
and Canada and mean client funds held by retail brokers will have to be held in
trust.

Australian-domiciled
retail brokers can currently use money held on behalf of their clients for a
wide range of purposes, including for working capital. Use of client money for
these purposes is either not permitted, or is more heavily regulated, in a
number of other G20 economies. This means Australian retail clients are at a
greater risk of loss in the event of a broker’s insolvency. 

The
government says the new client money protection regime will remove the current
exemption that permits a broker’s use of retail client money. Prohibiting a firm’s
use of client money in this way will ensure that clients’ money is held in
trust, and will be repaid to clients in the event of the broker’s
insolvency. 

“The
reforms fulfil the Government’s commitment, as part of its response to its root
and branch examination of Australia’s financial system, to improve protections
for client monies held in relation to derivatives, and to further enhance trust
and confidence in the financial system,” says Australia’s Minister for Revenue
and Financial Services Kelly O’Dwyer. “This will ensure that retail clients are
better protected when licensees become insolvent.

“The government
has conducted extensive consultation on the proposed regime, with almost 50
submissions received on the discussion paper and draft Bill,” she continues. “In
addition, numerous consultation meetings have been held with a broad range of
stakeholders, including industry associations, the Australian Securities and
Investments Commission (ASIC) and the ASX. Consultation commenced in February
2016, and continued into October.  As a result, the government is
satisfied it understands the nature and scale of the regulatory impact and
costs of these reforms.

“While the
Government acknowledges that the Bill may cause some disruption to firms that
use a particular business model, the Government’s primary objective is to
ensure the protection of retail client monies, and these reforms will achieve
this objective,” O’Dwyer adds.

The move
was welcomed by ASIC. “Importantly, the reforms will remove an exception in the
client money regime that allows Australian financial services licensees to
withdraw client money provided in relation to retail OTC derivatives from
client money trust accounts, and use it for a wide range of purposes including
as working capital,” explains ASIC commissioner Cathie Armour. “This exception
currently places retail derivative client money at greater risk of loss,
particularly in the event the licensee becomes insolvent.
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“Under the
reforms, licensees would be required to hold retail derivative client money on
trust,” she adds. “A fundamental protection of the trust requirement is that
client money can be returned to clients, and not paid to creditors, in the
event of the licensee’s insolvency. The requirement to hold client money on
trust already applies to the vast majority of financial products and financial
services under Australia’s client money regime.”
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The bill
will include a one year transition period to allow industry to adapt to the new
regime.

Colin_lambert@profit-loss.com

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Colin Lambert

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