“We work hard for their money,
So hard for it, honey
We work hard for their money
So we better treat it right. ”
— Donna Summer, Trust Accountant
Handle (clients’ money) with care
When applying for an Australian Financial Services Licence, ASIC ask ‘is the applicant likely to hold client monies including premiums, contributions and investment monies?’.
For most applicants the answer is no, because the Licensee doesn’t impose itself (or its representatives) into the financial relationship between the client and the product issuer. In most cases, the licensee doesn’t collect or aggregate client payments but limits its involvement to applying for, acquiring, varying or disposing of financial products on behalf of another.
By doing this, they avoid the complications involved with dealing with client money – including maintaining a trust account, segregating payments and reporting obligations.
However, some Licensees in their desire to help their clients, might be contravening the law by acting as a collection and payment agent for their clients (without satisfying the legislative requirements).
Let’s start at the very beginning, what is client money?
What is client money?
Part 7.8 of the Corporations Act 2001 defines client money as
money paid to an AFS licensee in connection with a financial service or product (and held on behalf of the client), but not as remuneration or payment for that service or product.
An example being insurance premiums paid by your client to you, the Licensee and you are not the insurer or an agent of the insurer.
This would be handling client money.
Client money does not include:
- Money received by the AFSL as remuneration;
- Reimbursement to the AFSL for expenses incurred on the client’s behalf;
- A payment made to discharge a liability incurred by the AFSL for acquiring a financial product for the client;
- A payment made to acquire an increased interest in a financial product to the AFSL that issues the product; or
- Money paid by way of loan.
It is important to understand what is defined as client money, AFSL’s that handle client money have a number of obligations and requirements that must be met.
Let’s take a closer look at those obligations now.
What obligations need to be met?
Your client’s money must be separate from your own, held in a different bank account known as a trust account (s981B). The account must be within an Australian Authorised Deposit-taking Institution.
The newly opened trust account may receive:
- Client money. Money paid by the client, or on behalf of the client for the client’s benefit;
- Interest on the amount in the account;
- Interest made on any investments made in accordance with the Corporations Act.
Your trust account may only withdraw funds in the following circumstances:
- To make a payment to, or in accordance with the written direction of, a person entitled to the money;
- Brokerage or any other proper charge;
- Pay money to the AFSL which it is owed;
- Pay an insurer in connection with a contract of insurance;
- Payments authorised by law.
There may be a few people who are reading this article that are now thinking their helpful client assistance may in fact be ticking the box of handling client money, what do you need to consider?
“The Bill will close a critical loophole in the protection of retail consumers, ensuring that Australian financial services firms can no longer use their retail clients’ money for their own – or other clients’ – purposes. ”
— The Hon Kelly O’Dwyer 1 December 2016
If you have gone that extra mile for your client/s, thinking your assistance was not handling client money, when in fact it was, you may now be wondering what’s next?, You need to consider:
- If your AFSL allows you to hold client monies?
- If your client money has been deposited in accordance with the Corporations Act?
- If the account you were depositing the client money is a trust account?
If you are answering no to any or all of the above questions, you will need to consider reporting your breach of the client money ASIC rules to ASIC. Importantly, we would always recommend you seek our advice and assistance with this step.
A breach of the ASIC rules for client money is a civil penalty provision, meaning ASIC may order you to pay a civil pecuniary penalty up to the maximum amount for the relevant provision.
You may be wondering has this been done, the answer is yes.
*** Breaking News ****
John Durant, Assurance Corp (Aust) Pty Ltd banned for three years.
In the Media Release dated 5 October 2023, ASIC confirmed that John Durant (adviser) was banned from providing financial services, controlling an entity that carries on a financial services business, or performing as an officer any function involved in carrying on a financial services business for three years.
ASIC found that from 30 July 2019 to 12 February 2021, the adviser:
- instructed clients to deposit money intended as payment of insurance premiums into his personal bank account, or into Assurance Corp (Aust) Pty Ltd business account and not into an IAA client monies account as required by law;
- failed to pay the funds received into the personal and business accounts; and
- misused client funds.
In determining the banning, ASIC noted the adviser’s conduct was a result of poor judgment rather than an act of dishonesty, however, given the potential for such conduct to harm clients a banning order was recorded against the adviser on ASIC’s banned and disqualified register.
Pershing Securities Australia Pty Ltd charged with breaching client money obligations.
Pershing Securities Australia Pty Ltd (PSAPL) pleaded guilty to breaching s993C(1) of the Corporations Act 2001 (the Act) and Regulation 7.8.01(1) of the Corporations Regulations 2001 by transferring sale proceeds from international trading in client’s securities from trust accounts into PSAPL’s general bank account, over a period of approximately 424 days between 1 March 2016 and 20 December 2017.
PSAPL also pleaded guilty to breaching s993B(1) of the Act by failing to ensure that some client money it received was held in segregated client money trust accounts on a total of 707 days between 25 January 2016 and 31 December 2018.
Additionally, PSAPL admitted guilt to a second breach of s993B(1) of the Act, which occurred when PSAPL failed to transfer $1,044.65 into a trust account on 21 August 2017. PSAPL was not sentenced for this breach, but it was taken into account during sentencing.
PSAPL were ordered to pay a fine of $15,000 for breaching s993C(1) and $25,000 for breaching s993B(1), taking into consideration the second breach of s993B(1) of the Act.
On top of the fine, PSAPL had additional licence conditions which required PSAL to appoint an independent expert to conduct a review to assess and report on whether PSAL has the current and ongoing ability to comply with the client money requirements of the Act. Where necessary, the expert will identify remedial actions and PSAL must provide ASIC with a plan identifying the remedial actions it proposes to implement.
PSAL was also required to provide ASIC with attestations from a Senior Executive and non-executive board member within PSAL. The Senior Executive must confirm that PSAL has taken all reasonable steps to identify and remediate all client money related breaches identified between December 2017 and the date of the attestation.
If remedial actions are necessary, PSAL is also required to withhold any bonuses payable to the PSAL Senior Executive with primary responsibility for implementing any required remedial action, until PSAL believes the remedial action has been fully and satisfactorily completed.
Then there was Societe Generale Securities Australia Pty Ltd
Societe Generale Securities Australia Pty Ltd (SGSAPL) was charged with breaching client money obligations. SGSAPL had two counts of breaching s993B(1) of the Corporations Act (the Act) by receiving client money in connection with financial services but failing to deposit that money into an Australian Authorised Deposit-taking Institution (ADI) or an approved foreign bank, as required under the law. SGSAPL were also found to have two counts of breaching s993C(1) of the Act, through making payments out of a client money account that were not permitted by regulations 7.8.02 of the Corporations Regulations (the Regulations).
SGSAPL paid a total penalty of $30,000 after pleading guilty to the above.
ASIC also imposed additional licence conditions, SGSAPL had to appoint an independent expert to assess and test its controls, compliance management systems and processes to ensure compliance with the client money requirements.
Additional conditions required SGSAPL to provide ASIC with attestations from a qualified SGSAPL senior executive and board member who would confirm all remedial actions recommended by the independent expert were adopted and implemented.
If SGSAPL did not provide the attestation, they must:
- cease on-boarding new customers if the on-boarding involves SGSAPL receiving client money from or for the benefit of the customer; and
- refrain from charging brokerage fees in relation to any futures transactions executed by SGSAPL to the extent that the transactions involve SGSAPL receiving client money in Australia.
These restrictions remained for the period the attestation remained outstanding.
Handle with care
Whilst ASIC media releases can be frightening, learning from others is important.
John Durant, Pershing Securities Australia Pty Ltd and Societe Generale Securities Australia Pty Ltd breached the ASIC rules and obligations around handling client monies and paid the penalty.
The financial penalty for these failures is clear, but what’s not clear is the time, money and reputational damage that comes with these proceedings.
Navigating your way through client money obligations can be onerous, so we recommend you get the advice you need, before you find you needed it. If you have questions, remember that we ‘re here to help.
Demystify ASIC rules and code of ethics financial planning.