The proposed changes are intended to:
- update the 2014 guidance relating to broker obligations under the now repealed Financial Advisers Act 2008 (the FAA), and
- address issues identified by the FMA through its monitoring of providers’ compliance under the Financial Markets Conduct Act 2013 (the FMCA).
Submissions are due by 1 November 2022. We will be happy to assist you with preparing a submission.
No feedback is sought on the commentary on the general obligations on providers under FMCA subpart 5B of Part 6 as the changes to these duties from the FAA are largely cosmetic.
The FMA has set out its views on how the provisions of the Insurance Intermediaries Act 1994 (the IIA) relating to non-broker insurance intermediaries fit within the client money or property service regulatory landscape set out in the FMCA.
Under section 431Z(2)(d) of the FMCA, the obligations for handling client money and client property do not apply to a “broker” (as this term is defined in the IIA). Instead, insurance intermediaries who are “brokers” have comparable obligations under the IIA.
However, the position is less clear where client money or property services are provided by a person who is an “insurance intermediary” but is not a “broker” under the IIA (i.e., a non-IIA broker).
The FMA considers that in circumstances where non-IIA brokers receive money related to premiums or claims, or monies otherwise paid under or in relation to a contract of insurance, they are not providing a client money or property service within the meaning of the FMCA. However, the consumer protections set out in sections 4 and 5 of the IIA will continue to apply to these services.
Identifying the provider
The FMA acknowledges that in complex transactions with multiple parties, it is often unclear who is responsible to the client for providing the client money or property services.
The proposed guidance recommends that parties ensure that all contractual documentation, and any client communication, clearly and unambiguously identifies who is responsible for compliance with the relevant obligations under the FMCA.
In terms of section 431ZI of the FMCA, which provides that where a person (A) provides a client money or property service on behalf of another (B), the FMA considers that B is the provider, and that it is B that owes duties to the client under the FMCA. A, however, is still required to be registered on the FSPR.
Poor contractual documentation (i.e. where even the documents are unclear as to who the provider is) risks both A and B being liable under section 431W and 431ZI of the FMCA.
Under section 431W(2) of the FMCA, custodial services are a subset of client money and property services (i.e., all custodians are providers, but not all providers will be custodians). The Financial Markets Conduct Regulations 2014 require custodians to comply with a range of additional obligations in relation to providing custodial services.
The guidance focuses on reporting by custodians to clients as a fundamental part of the custodial regime.
It clarifies that clients must specify their own address for reporting, and only in exceptional circumstances should a client be permitted to nominate another individual’s address to receive custodian reports.
Exceptional circumstances, in the FMA’s view, include instances where the client is unable to manage their own affairs (either through not being competent or not having legal capacity). The guidance further proposes that a nominated person must be independent from the transactions that are the subject of reports.
The proposed guidance also confirms that reporting can be provided electronically, either by email or through an electronic facility (if the information is made available on a substantially continuous basis). The client must expressly opt in to receive their reports electronically, and be given access to any portal (or other electronic means) by which they receive the reporting.
The proposed guidance carries over a substantial amount of the content from the original 2014 guidance note. This content has not been revised materially, but has been updated to reflect changes in terminology for the new regime, and includes:
- outsourcing of client money or property services to third parties
- protection of Common Shareholder Numbers (CSNs), Security Reference Numbers (SRNs) and Faster Identification Numbers (FSNs)
- cross-use and deduction of margins from client money, and
- bank account reconciliations and client reporting.
The FMA has also included content that it has not asked specific consultation questions on. This relates to:
- co-mingling - the prohibition against co-mingling has been carried through to the new client money rules, but there are exclusions in prescribed circumstances. In order to rely on these exclusions, a provider must adhere to the co-mingling duties set out in the regulations, and
- DIMS licensees and custodians - the FMA has confirmed the client money and property rules apply to DIMS licensees and custodians, and encourages them to familiarise themselves with these duties.
In addition to seeking feedback on the focus areas above, the FMA has also asked general questions such as whether there are any other areas that should be included in the proposed guidance.