The Financial Markets Authority (FMA) has published new guidance for providers of client money or property services (Providers) and custodians (the Guidance). The Guidance replaces the FMA’s 2014 guidance on broker obligations and will help Providers and custodians to meet their obligations under the Financial Markets Conduct Act 2013 (FMC Act).
The Guidance can be found here.
Who needs to read this? Why?
All Providers and custodians should familiarise themselves with the new Guidance and what has changed since 2014.
What does it cover?
The first part of the Guidance covers general obligations and applies to Providers of client money and client property services, while the second part covers custodian obligations specifically. The Guidance is materially different to the 2014 guidance. We summarise some of the key takeaways, below.
Multiple parties
Where multiple parties are involved (e.g. a Provider, a custodian, and/or a separate nominee), the Guidance seeks to unravel which entity owes certain duties and which entity or entities should be registered on the Financial Service Providers Register. This remains a difficult and context-specific area and legal advice may still be needed to determine the correct answer.
Custody reporting
Providers and custodians should take all reasonable steps to ensure that electronic addresses are those of their client or the client’s nominated party, and that an email address provided is not one that has been shared with the client’s financial advisor or any related parties. This is to reduce the risk of fraudulent activity and to ensure that clients have an independent record of transactions relating to their investments.
Reporting via an electronic platform
The FMA is taking a broad and interpretative approach to the meaning of ‘electronic address’, where this captures both email and ‘posting’ reports to an electronic portal. The Guidance emphasises the importance of ensuring that appropriate systems and controls are implemented to the form of electronic delivery chosen by the client, where custodians should consider:
- the ability of reports or information to be altered by the platform provider;
- their independence and reporting obligations to clients;
- the obligation to comply with the FMC Act and FMC Regulations, which remains with the provider;
- the level of security of the platform;
- whether the assurance report covers the processes, systems, and controls of the provider in respect of the report being provided to the client;
- the safeguards implemented to ensure the integrity of the custodial reporting; and
- what agreement has been obtained from the client in respect of delivery under regulation 229R of the FMC Regulations.
Verifying clients’ electronic addresses
An important change introduced by the Guidance is in the way that a client’s address may be verified, where the FMA’s view is that the address specified by the client should be their own address. In the case of a nominated custodian, reports should be sent to both the client and the custodian. The FMA is taking a ‘purposive interpretation’ of what ‘client address’ means, taking into consideration the policy basis for custodial obligations to ensure that a client’s investment status is reported to them independently. This approach is also important to the reduction of any potentially fraudulent behaviour by a financial advisor or any related party.
Insurance intermediaries
The Guidance outlines the FMA’s view on how the rules apply to insurance intermediaries under the Insurance Intermediaries Act 1994 (IIA), clarifying that where an intermediary who is not a “broker” under the IIA receives money related to premiums or claims, it is not providing a client money or property service.
Our view
We see the substantive updates provided by the Guidance as a welcome update to the previous guidance which is 10 years old. Providers and custodians should take time to read and understand the Guidance to determine how it applies to them and how they will adapt their systems and processes to comply. The Guidance does not completely resolve, however, many of the common questions we come across in this area (particularly where there are multiple parties).
What next?
Providers of client money or property services should look to ensure that all systems and processes comply with the Guidance. If you have any questions in relation to the Guidance or client money or property services more generally, please contact one of our experts.
This article was co-authored by Andrew Walker, a Law Clerk in our Financial Services team.
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