AFS licensee update – client money rule changes

The Federal Government has released a policy paper seeking feedback on proposed changes to the Australian client money rules.  A copy of the policy paper can be found here.

Under current legislation, money given to an AFS licensee for a financial product or service by a client that is not remuneration or payment for the product or service must be placed into an account by the licensee and a statutory trust is created over that money (other than money required for margin calls).  However, an exemption to this rule exists in the case of derivatives, pursuant to which a licensee can withdraw client money to meet its own hedging obligations.  It is also possible for a client to give a general direction to a licensee relating to the use of client money so that a licensee could obtain a direction to use client money for working capital purposes, for example. Client money can also be commingled with other client’s money.

When a licensee that holds client money collapses, like MF Global, Sonray Capital Markets or GTL Trade-up for example, much of the money that has been withdrawn under the exemptions cannot be traced back to the client and so clients are not really afforded the protection intended by law.  In a winding up of the licensee, the clients generally receive a pro rata share of what is recovered that is not necessarily reflective of their actual account balances where pooling has occurred.

In order to tighten the rules, the Federal Government intends to implement three key measures:

  1. Remove the exemption which allows retail client money to be used for hedging obligations.  The term ‘retail client’ will include clients who are wholesale because they ave been certified as sophisticated by a licensee under section 761GA of the Corporations Act.
  2. Restrict the ability for clients to provide a blanket authority to use their money for general purposes, like working capital for the licensee.
  3. Grant ASIC a power to require licensees to report on client money held.

These changes will impact mostly on AFS licensees who trade in foreign exchange, contracts for difference and binary options.  Lobby groups have been formed to represent the for and against arguments.

Submissions close on 29 January 2016.