As part of the Phase 1 implementation of the Financial Markets Conduct Act 2013 (FMC Act), the Financial Advisers Act 2008 (FAA) has been amended to include new obligations for brokers who provide ‘custodial services’ to retail clients that relate to ‘FMCA financial products’. There are also additional requirements and limitations in relation to the provision of broking services. These changes are incorporated into the Act through the Financial Markets (Repeals and Amendments) Act 2013, supplemented by the new Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014which came into force on 1 April.
The Government has decided to delay the introduction of the amendments to the FAA (and relevant regulations) which:
- explicitly prohibit brokers from placing their own money in client money trust accounts to clarify that the practice of holding ‘buffers’ of broker funds in client money trust accounts, to ensure the account has adequate funding, is not permitted; and
- extend brokers’ retail trust accounting obligations in sections 77P to 77T to FMC Act custodial services provided by a custodian to certain wholesale clients.
These will now be introduced in the second phase of the FMC Act implementation on 1 December 2014 to allow brokers time to adjust any current practices which would contravene these provisions.
The amended FAA makes it clear that ‘custodial services’ are within the definition of broking services in the Act and that the broker’s disclosure and conduct obligations in Part 3A of the Act apply to custodians. These changes (together with a consequential clarification to the Financial Service Providers (Registration and Dispute Resolution) Act 2008 also clarify that a custodian must register on the register of financial service providers established under that Act.
The Financial Advisers (Custodians of FMCA Financial Products) Regulations apply to custodial services that relate to ‘FMCA financial products’ (that is, any equity security, debt security, managed investment product, or derivative as each of those terms is defined in the FMC Act). Under these regulations custodians must:
- provide clients with specified information relating to client money and client property and allow for clients to receive that information electronically and to make written requests for that information;
- comply with the reconciliation requirements for records of client money and client property held by the custodian; and
- obtain assurance engagements with qualified auditors in compliance with prescribed requirements relating to such engagements.