ASIC RG 160: Client Money Handling for AFS Licensees

Client money regime overview

Client money obligations for Australian Financial Services (AFS) licensees are established in Division 2 of Part 7.8 of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001. While ASIC Regulatory Guide 160 initially addressed time-sharing scheme disclosure, current guidance is principally found in ASIC Regulatory Guide 212 'Client money reporting rules' and other related materials. This article provides an overview of the broader client money handling framework applicable to AFS licensees.

A key requirement is outlined in section 981A, which mandates that AFS licensees hold client money in a designated trust account held at an Authorised Deposit-taking Institution (ADI). This ensures client funds are segregated and protected.

Section 981D places restrictions on the use of client money. It specifies that funds can only be applied for purposes detailed in section 981D(1), such as paying the client, paying the licensee at the client’s direction, or investing in an investment under regulation 7.8.02. Non-compliance with these client money requirements constitutes a strict liability offence and a civil penalty contravention under section 1317G.

Reforms to retail client money use

The Treasury Laws Amendment (2017 Measures No. 6) Act 2018 introduced changes to how Australian Financial Services (AFS) licensees handle retail client money. Specifically, section 981H was inserted into the Corporations Act 2001, impacting the use of retail client money in relation to over-the-counter (OTC) derivatives.

This restriction applies from 4 April 2018 to AFS licensees dealing in OTC derivatives. Section 981H prohibits the use of retail client money as margin or guarantee for OTC derivative transactions. It also prevents its use to underwrite transactions or to meet the obligations of the AFS licensee itself.

Importantly, the restrictions outlined in section 981H do not apply to wholesale client money. Wholesale client money can still be used in connection with a wholesale client’s transactions, provided certain conditions are met.

Client money reporting rules (RG 212)

ASIC made the ASIC Client Money Reporting Rules 2017 under section 981J of the Corporations Act 2001. Regulatory Guide 212 ‘Client money reporting rules’ explains how these rules apply to AFS licensees dealing in OTC derivatives.

Licensees must reconcile client money accounts daily and report to ASIC monthly, in accordance with the reporting rules. Any breaches of the client money reporting rules must be reported to ASIC as soon as practicable.

An annual external audit of client money is required under section 990K of the Corporations Act 2001.

ASIC enforcement focus

ASIC has consistently identified client money handling as a key enforcement priority. This ongoing focus has resulted in a range of actions taken against non-compliant AFS licensees. These actions have included Federal Court proceedings, the issuing of infringement notices, and the imposition of specific licence conditions.

Regulation 7.8.02 permits the investment of client money, but only in specified low-risk instruments. Examples of these permitted investments include cash deposits held with an Authorised Deposit-taking Institution (ADI) and semi-government bonds.

AFS licensees holding substantial client money balances are subject to heightened scrutiny. They may be required to meet additional licence conditions, undergo regular audits, and fulfil ongoing reporting obligations to ASIC. Any interest earned on client money generally belongs to the client, although this is subject to the terms of the client agreement and disclosure requirements outlined in the Corporations Regulations.