The Financial Markets Authority (FMA) published a report on how effectively financial advice providers (FAPs) and discretionary investment management service (DIMS) providers protect client money and property. The Effective Protection of Client Assets report is based on findings from the FMA’s reviews of FAPs and DIMS providers. The purpose of the exercise being to improve the FMA’s understanding of how these licensed providers are complying with their obligations and how they satisfy themselves that investor assets are adequately protected.

Links to the report and media release are available here and here.

Who needs to read it? Why?

Custodians and anyone else who deals with client money or property on behalf of clients (CMPS providers). 

Weak asset protection can lead to significant investor losses and impact confidence in financial services. The report identifies key gaps between what the FMA wants to see from CMPS providers and what these providers appear to be doing in practice. The FMA’s findings in the report could help support provider improvements to achieve more effective protection of client assets.

What does it cover?

The FMA found that CMPS providers are generally meeting their obligations and have highlighted examples of good practice. That said, the report identifies weaknesses in oversight, governance, client reporting and investor information that could increase the risk of consumer harm if left unaddressed. 

Weaknesses include a lack of understanding about who is ultimately responsible for safeguarding investor assets when custody is outsourced, and some examples of insufficient or absent processes and controls. The FMA also observed that investors have a limited understanding of how their assets are safeguarded, which increases the risk of issues or harm going undetected. 

The FMA’s findings highlight the importance of strong oversight to protect client assets, across four key areas:

• oversight of client money and property services;
• client reporting; 
• governance, risk management and fraud; and
• information provided to investors about fees.

Our view

The report presents an opportunity for CMPS providers to review their processes and procedures against the FMA’s findings. We would encourage providers to identify any gaps or areas where they could improve to better align their oversight and service delivery procedures with the FMA’s expectations. 

Any key learnings should be implemented with a view to mitigate the risk of consumer harm and ultimately aim to ensure more effective asset protection.

What next?

If you have any questions relating to the oversight or delivery of your client money and property services, or if you are a CMPS provider who is considering how to best implement the FMA’s findings, please contact one of our experts.

This article was co-authored by Lucy King a Solicitor in our Financial Services team.