Australian Financial Services (AFS) licensees holding client money are on ASIC’s radar, with a particular focus on intermediaries demonstrating high financial risk or stress. This follows two recent cases where AFS licensees faced criminal prosecution for breaching client money provisions.
In its 2020-24 Corporate Plan, ASIC has outlined that one of its market focus areas will be safeguarding client money. This includes proactive surveillance to ensure compliance with client money handling obligations.
ASIC takes the view that these types of offences are serious misconduct. These offences have been legislated to protect investors and enhance confidence and integrity in Australia’s financial markets.
What is client money?
As an AFS licensee, client money is money paid by a client (or a person acting on behalf of the client) to you in connection with a financial product or service that you have provided, or will provide, to them.
For example, client money may be:
Client money doesn’t include money paid by a client:
What are your client money obligations?
If you deal with client money, there are a number of requirements that apply. These include:
To safeguard client money, you should ensure that you have a solid policy governing these obligations, including who can make withdrawals from the account and always require two signatories. This ensures that you meet your regulatory obligations and shields client money from fraud or other unauthorised activity.
Who does this apply to?
The client money obligations may apply to a range of financial services intermediaries and financial product providers. This is irrespective of whether you deal with retail and/or wholesale clients. Common examples include:
What happens when things go wrong?
You will commit an offence if you:
If a breach occurs, you will need to consider whether the breach is significant and requires reporting to ASIC. If you’re unsure, it’s best to seek advice from a lawyer.
Breaching the rules is an offence of strict liability. This means ASIC doesn’t need to prove that you intended to breach the law.
If you have breached your AFS licence, ASIC has the power to:
ASIC may also accept an enforceable undertaking as an alternative to civil or licensing action.
Two recent cases show how serious ASIC is:
Pershing Securities Australia was the first company in Australia to face criminal prosecution for breaching client money provisions. This year it was charged with two counts of failing to pay client money into an account and one count for failing to comply with requirements relating to a client money account. Pershing Securities Australia was ordered to pay a $40,000 penalty after pleading guilty to breaching its client money obligations.
ASIC also imposed additional licence conditions requiring Pershing Securities Australia to:
In the case of Societe Generale Securities Australia, the company pled guilty to four separate offences. Each offence carries a maximum penalty of $45,000. The matter is awaiting sentencing. ASIC also imposed the same licence conditions which applied to Pershing Securities Australia.
While these penalties aren’t significant, the additional licence conditions can be financially draining and use valuable human resources. They can also damage your reputation.
Client money requirements are not always straightforward. If you need advice on whether the client money rules apply to you, please get in touch – we’d be happy to help.