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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 8 – THE NEW REGIME FOR CUSTODIAL SERVICES
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The custodial services regime is set to be incorporated into the Financial Markets Conduct Act (‘FMC Act’) as part of the financial advice reforms. While much of the focus of the reforms has been on the new licensing regime for financial advice providers, there are also some notable changes for providers of broking and custodial services to be aware of.

In brief:

In this eighth in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss the new regime for custodial services, including:

  • the new terminology used in the Bill
  • changes to the duties and obligations of providers of client money or property services
  • the flexibility for relief to be granted from the prohibition on co-mingling of provider and client money and property.

In the Series so far:

1 - confirmation of the proposed reforms
2 - key concepts
3 – the FAP conundrum
4 – key changes to the FSP Act
5 - transitioning to the new regime
6 - offshore advisers 
7 - the Code of Conduct and Code Working Group

In full: 

While much of the focus of the reforms has been on the new licensing regime for financial advice providers, there are also some notable changes for providers of broking and custodial services to be aware of.

The key regulatory requirements for custodians are currently found in the Financial Advisers Act 2008 (‘FAA’) and the Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014 (‘Custodian Regulations’). Separate requirements apply to custodians of registered managed investment schemes under the FMC Act.

With the repeal of the FAA (as part of the financial advice reforms), the bulk of the custodial services regime will be incorporated into the FMC Act framework. We anticipate that the Custodian Regulations will be replicated in regulations made under the FMC Act.

While the substance of the regime remains largely unchanged, there are a few notable changes for current providers of custodial services to be aware of.

A change in terminology

Industry will be pleased to see that its calls to remove the confusing terms ‘broker’ and ‘broking service’ from the regime have been heard. Though a few references to these terms linger on, we anticipate that they will be removed in the final Bill.

Instead, of ‘brokers’ providing ‘broking services’, the new regime will involve ‘providers’ providing ‘client money or property services’. A client money or property service is a ‘regulated’ client money or property service if it is not excluded under an exemption. ‘Custodial service’ survives as a defined term, as a sub-set of the ‘client money or property service’ concept.

But is it really just a simple terminology switch?

A more detailed read through the Bill reveals some subtle additional changes:

  • On the face of it, any person providing client money or property services will come within the scope of the new regime. There is no longer a pre-requisite for that person to be ‘carrying on a business’ of providing client money or property services, although you will still need to be registered to carry on such a business and won’t need a market services licence to do so.
  • The definition of ‘custodial service’ now refers to client money or client property being held in trust under an ‘agreement’ (which is defined in the FMC Act as including any contract, arrangement, or understanding) between two or more persons. This replaces the narrower reference to ‘arrangement’ currently contained in the FAA.


What is not clear is whether or not these changes are intended to alter the scope of the existing terms, or whether they are intended to simply be cosmetic drafting changes. We suspect the latter.

Changes to duties and obligations

Existing duties and obligations remain largely the same, with small changes made for consistency with the FMC Act environment in which they will be housed.

At a high level, anyone providing a regulated client money or property service to retail clients must:

  • disclose prescribed information; and
  • comply with the various conduct requirements for handling client money and property.


In line with the FMC Act standard applying to product disclosure statements, prescribed information must not be given if it contains any false or misleading statements (or statements that are likely to mislead) or omits any required content and those statements or omissions are materially adverse from the point of view of a client.

The fair dealing provisions of the FMC Act prohibiting misleading conduct will continue to apply to providers who provide a client money or property service ‘in trade’. Regulations may also extend some of the retail conduct obligations to wholesale client services.

In addition, the Bill requires a person providing a regulated client money or property service (whether to wholesale or retail clients) to exercise the level of care, diligence, and skill that a ‘prudent person’ engaged in the business of providing the service would exercise in the same circumstances. This replaces the ‘reasonable broker’ standard under the FAA, bringing it into line with the FMC Act standard applying to other types of financial markets participants.

Possible future relief from co-mingling prohibition

Another win for industry is the provision in the Bill for providers to deposit their own money into a client account in certain limited circumstances.

Though the FMA has already granted exemptions under the FAA permitting client money to be held together with firm money in certain circumstances, that hasn’t provided a permanent legislative solution to the impracticality of the statutory prohibition on co-mingling.

While the Bill replicates the current FAA prohibition on the co-mingling of provider and client money and property, it also builds in flexibility for regulations to prescribe circumstances in which the prohibition does not apply.

We expect that any regulations made will be in substantially the same form as the current exemption notices, with any provider money legitimately held together with client money then being deemed to be client money for the purposes of the regulatory requirements.

Conclusion

The changes to the custodial services regime are not extensive. However, changes to some of the details mean that custodians will need to ensure that they will be ready to comply with the new requirements before the new regime comes into effect – no transitional period is contemplated.

Start a conversation

If you would like a specific briefing on the Bill and what the proposed reforms may mean for your business, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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