Government to close client monies loophole

The Coalition will proceed with reforms that will prevent providers of over-the-counter derivatives from using client monies in other parts of their businesses.

In a statement released yesterday, Minister for Financial Services Kelly O’Dwyer said client monies that are paid to firms for derivatives transactions will have to be held in trust once the legislation is passed.

At present, Ms O’Dwyer said, Australian financial services licensees (AFSLs) can currently use money held on behalf of retail clients for a wide range of purposes, including for working capital.

“Use of client money for these purposes is either not permitted, or is more heavily regulated, in a number of other advanced G20 economies,” Ms O’Dwyer said.

“Permitting the use of client money for these purposes therefore exposes Australian retail clients to a greater risk of loss in the event of the firm’s insolvency.”

The Coalition introduced a draft bill on the subject in February 2016 and has undergone consultation with a “broad range of stakeholders”, Ms O’Dwyer said.

In making the announcement, Ms O’Dwyer referenced the collapse of stockbroking firm BBY, which went into liquidation on 17 May 2015 owing as much as $16 million to clients.

ASIC has also expressed concerns that clients of firms such as BBY do not understand they are exposed should there be a deficit in the account operated by an AFSL holder and the licensee is unable to pay the deficiency.

A 2011 Treasury discussion paper, which received over 1200 responses, also weighed up whether the current rules about client monies should be changed.

In announcing the proposed changes, Ms O’Dwyer acknowledged the new rules could “cause some disruption to firms that use a particular business model”.

“The bill will include a one year transition period to allow industry to adapt to the new regime,” she said.