The 2018 Client Money Laws

On 4 April 2018, certain Australian Financial Services License (AFSL) holders will find themselves facing a new suite of rules and compliance obligations which have the potential of substantially altering the way they conduct their businesses on a day-to-day basis.

These changes relate almost entirely to a specific type of client money, referred to in the legislation as ‘derivative retail client money’, and impose new restrictions on the handling of this type of money.

Licensees who deal in over-the-counter (OTC) derivatives, and who, by virtue of this, hold client money in their segregated client money bank accounts, will be most severely affected by the new reforms.

The changes originate from three sources (collectively, the Client Money Reforms):

1. the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 (the Amendment Act);

2. the Corporations Amendment (Client Money) Regulations 2017 (the Client Money Regulations); and

3. the ASIC Client Money Reporting Rules 2017 (the Reporting Rules).

How do I know if I’m affected?

As a licensee, you may have already received correspondence from the Australian Securities & Investments Commission (ASIC) giving you notice of the Client Money Reforms and requesting details about your intended course of action in ensuring that you are prepared before 4 April.

However, just because you haven’t been contacted by ASIC doesn’t mean you’re not affected by the reforms. Essentially, if you hold any money that has been paid to you by a retail client for a financial product or service that relates to derivatives, the Client Money Reforms will affect you.

What about Wholesale Clients?

As a general rule, because the Client Money Reforms only apply to Derivative Retail Client Money and Property, wholesale client money will remain unaffected. Be aware, however, that sophisticated retail investors, which are normally treated as if they were wholesale clients, are treated as retail clients for the purposes of the Client Money Reforms:

For the purposes of the definitions of ‘derivative retail client money’ and ‘derivative retail client property’, ‘retail client’ includes clients who are sophisticated retail investors as set out in section 761GA of the Corporations Act 2001 (Cth). This ensures that the sophisticated investor carve-out contained in section 761GA cannot be exploited to circumvent the amendments. While sophisticated investors are generally high net worth individuals, like other retail clients, they may not always have the requisite knowledge of complex financial services such as derivatives to evaluate the risks associated with how licensees use derivative client money (Treasury Laws Amendment (2016 Measures No. 1) Bill 2016 Explanatory Memoranda [5.29]).

What do I need to do?

As a licensee, if you haven’t already, you will need to become familiar with the effect of the Client Money Reforms and assess how they will impact your business. The Client Money Reforms, generally speaking:

1. prevent you from using derivative retail client money for hedging, as your working capital, or for meeting the obligations of any other entity apart from those of the retail client from whom the derivative retail money was paid;

2. impose daily, monthly, and yearly client money reconciliation requirements, which require you to reconcile the amount of ‘reportable client money’ (essentially derivative retail client money) you should have in your segregated client money account or accounts against the amount actually held in those accounts;

3. impose reporting obligations should these reconciliations fail; and

4. impose large fines for failing to report the above.

Moreover, any written directions given to you by retail clients (including in your Terms and Conditions), to the extent that they give you authority to use that client’s funds as capital, for hedging, or to meet someone else’s obligations. will be of no effect from 4 April.

Finally, given that the Client Money Reforms have the potential to radically effect how you handle client money, your Product Disclosure Statements will need to reflect any new client money policies that you develop in response to the Client Money Reforms. ASIC requires that your Product Disclosure Statements ‘clearly and prominently disclose […] how [you] deal with client money. This includes when, and on what basis, [you] make withdrawals from client money […]’ (ASIC RG 168.94)

If you haven’t engaged an independent legal adviser to explain the full extent of the Client Money Reforms to you, you will need to do this very soon. You may also need to undertake an assessment of your current reconciliation and reporting infrastructure to ensure that you are ready to satisfy the reconciliation requirements once the reforms come into effect.

How can O’Loughlin Westhoff help?

O’Loughlin Westhoff has been working closely with industry participants ever since the initial exposure of the Client Money Reforms. We are able to provide advice in respect of the impact of these laws on your business, and we are also able to conduct reviews of your website, Product Disclosure Statements, and any other documentation to ensure you continue to meet ASIC’s Disclosure Benchmarks.