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ASIC finalises its client money reporting rules

Chris Hamblin, Editor, London, 10 October 2017

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The Australian Securities and Investments Commission has released its latest client money rules which, from 4 April next year onwards, will impose record-keeping, reconciliation and reporting obligations on Australian financial services (AFS) licensees that hold 'derivative retail client money' as defined in the Corporations Act, unless the client money relates to a derivative that is traded on a fully licensed domestic market such as ASX 24.

The idea is for customers (and ASIC) to know more about their AFS licensees’ receipt and use of derivative retail client money. The rules’ precursor was Consultation Paper 291, which ASIC issued in July. In response to feedback from the industry, ASIC changed the timing of its original rules to do with reconciliation and in doing so, it believes, it made the client money rules easier to obey.

ASIC has also today released an information sheet (number 226) to help AFS licensees comply with their obligations under the client money rules. ASIC released these rules after the passage of a bill called the Treasury Laws Amendment (2016 Measures No. 1) Bill 2016 and the Corporations Amendment (Client Money) Regulations 2017. It expects these reforms to prevent AFS licensees from withdrawing money provided by retail derivative clients and using it for the wide range of purposes currently permitted under the Corporations Act, including as the AFS licensee's own working capital. Other reforms involving client money will take effect on 4 April as well. This gives AFS licensees a six month transition period in which to make sure that they have the necessary systems, policies and procedures up and running.

Rules for reconciliation

Every financial services licensee must pick (and write down) the time of day at which it will perform the reconciliations required the rules. The recordkeeping period for this group of rules is 7 years.

Annual declarations by directors and auditors

Rule 3.1.12 states that, for financial years ending after 1 July 2018, every financial services licensee must prepare and give to ASIC within 4 calendar months of the end of each financial year of the licensee:

N a directors’ declaration that states whether, in the directors’ opinion, the licensee has complied with these rules; and

N an external auditor’s report containing the information set out in a set format, signed by a partner or director of the auditor.

The declaration must be dated, signed by a director and made in accordance with a resolution of the directors. The top penalty for non-compliance is A$1,000,000 (US$777,525), as it is for failure to send reports off to ASIC (rule 3.1.1) and for other failures besides. The prescribed form states: “We have conducted an independent audit of the internal controls designed to ensure compliance with the requirements of the rules in order to express an opinion on them to the directors of the licensee for the financial year. Our procedures included examination, on a test basis, of evidence supporting the licensee’s accounting records and operation of its internal controls in relation to compliance with the requirements of the rules.”

At the end of the form, however, there is a fairly lengthy disclaimer about the imprecise nature of audits and the fact that they are not designed to detect all frauds or weaknesses in internal controls.

When HNWs demand information

A financial services licensee must comply with a written request from ASIC or one of its HNW clients for any record it keeps of the amount of ‘reportable client money’ it has received from him within five business days after the request. He has the option of granting the firm an extension in writing.

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