A broker executes buy and sell orders on behalf of clients with their money or property, whereas a custodian holds and protects money or property for clients as well as execute orders to pay or transfer money or property. Under the FA Act, all custodians are brokers, but not all brokers are custodians.
Under the Financial Advisers Act (FA Act) a broker is defined as a financial services provider who holds, transfers or makes payments with client money or property, on behalf of clients, like,
insurance and mortgage brokers only if they receive, hold, pay or transfer client money or property which is used to buy, hold or sell a financial product. Note that for insurance brokers, client money handling obligations under the Insurance Intermediaries Act 1994 apply, instead of the FA Act.
providers of portfolio administration services
financial advisers, who receive property or money from clients eg DIMS providers.
For a detailed definition of ‘broker’ and ‘broking services’ see sections 77B, 77C and 77U of the FA Act.
The obligations of brokers apply whether their services are to retail or wholesale clients. This includes custodians of client money and client property.
Client property is a financial product (or an interest in a financial product), eg shares, debt securities, derivatives and managed investment products, or is client money.
Client money is money received in connection with client property.
Who is not a broker
Certain financial service providers are not brokers under the FA Act, including:
Insurance and mortgage brokers that DO NOT hold, pay or transfer client money or property.
Lawyers, incorporated law firms, conveyancing practitioners, chartered accountants, tax agents, real estate agents and registered legal executives providing a service in the ordinary course of their business.
Licensed derivatives issuers. They are subject to separate obligations.
Employers offering employees financial products such as employee share purchase schemes.
Non-transferable instruments, such as non-transferable cheques or automatic payment forms payable to another person are not considered to be broking services.
For the custodian regulations to apply, the client money or property must relate to a financial product, ie debt securities, equity securities, managed investment products or derivatives.
Who is not a custodian
A person is not a custodian under the custodian regulations if any of the following apply:
They hold client money or property solely for the purpose of completing a transaction, securing an obligation, or both. For example, a broker is not a custodian for execution-only services provided to clients on a T+2 basis, where the client money and property is returned to the client (or a party acting on the client's behalf) immediately following execution.
The custodian and all their associates provide the services to no more than five clients in total.
They are a trustee of a family trust for the trust's assets.
They are an executor, an administrator or a trustee of a deceased person's estate for the estate's assets.
They are an attorney acting under an enduring power of attorney for a donor's property in circumstances where the donor becomes mentally incapable.
They are appointed by the court for a person's assets; or where they are acting on behalf of a sub-custodian.
Discretionary investment management service (DIMS) custodians
Under the Financial Markets Conduct Act 2013 (FMC Act), a financial services provider who holds client money or property in relation to discretionary investment management services (DIMS) is a DIMS custodian. DIMS custodians are also subject to the custodian regulations.
Client money and property held for a retail DIMS must be held by a custodian who is independent of the DIMS provider, except where the client money and property is held directly by the client. The FMA, may in limited circumstances, allow the use of an associated part custodian. For more information see our DIMS licensing section.
Managed investment scheme (MIS) custodians
Under the FMC Act, a financial service provider who holds the property of a managed investment scheme is an MIS custodian.
For managed investment scheme property, MIS custodians are not custodians under the custodian regulations. They do not need to comply with broker obligations under the FA Act.
However, MIS custodians have similar obligations under the FMC Act for that property, including meeting the standard of care, skill and diligence required, holding scheme property on trust, record keeping and reporting.
All custodians are brokers under the FA Act so must comply with the relevant Broker obligations. Custodian obligations for DIMS may be enforced under either the FA Act or the FMC Act. In addition, custodians have their obligations set out in the custodian regulations. Under the custodian regulations, custodians have reporting, reconciliations, assurance engagement and general conduct obligations among others.
Who is responsible for broker and custodian obligations
Where a broker provides all broking services to the client, including custodial services, they must comply with all of the broker obligations under the FA Act and the custodian regulations. This includes the requirement to report to clients and to obtain an assurance engagement. See Scenario 1 which clarifies this.
Scenario 1: Where a person (Person A) provides the broking service (including a custodial service that is subject to the custodian regulations) on behalf of another person (Person B):
Person B (not Person A) is treated as the broker having the broker obligations, including any obligations under the Custodian regulations (see sections 5I and 77U of the FA Act)
However, Person A will perform the requirements under the custodian regulations, including reporting to clients and obtaining an assurance engagement.
Person B must ensure that Person A complies with the requirements of the custodian regulations.
Scenario 2: Where a sharebroker outsources the custody of shares to a custodian:
Both the sharebroker and the custodian will be providing broking services and both will need to be registered on the FSPR. See our registration page for more information. Custodians should choose the FSPR catergory 'Broking service (including custodial service)'.
The custodian is a 'custodian' as defined in the custodian regulations.
If the custodian is providing the custodial service on behalf of the sharebroker's business (see the definition in section 5I of the FA Act) then the sharebroker has obligations as a broker under the FA Act and the custodian regulations.
However, because the sharebroker is not providing the custodial service, they are obliged to ensure that the custodian complies with the requirements of the custodian regulations,eg obtaining an assurance report. This means where the custodian fails to perform their custodial services in accordance with the custodian regulations, then the sharebroker will be held responsible for failing to ensure that the custodian complied. The sharebroker should ensure they properly supervise the custodian (or any other broker) that acts on behalf of the sharebroker's business.
Claims may arise from clients for compensation for losses incurred as a result of a breach or breaches, including the duty to exercise required care, diligence and skill.
Action by the FMA
If you breach of an obligation, we may:
give direction orders
go to the High Court to seek injunctions, banning orders, and prohibitions on payment/transfer of money, financial products or other property; or
issue temporary banning orders in some circumstances.
Breaches, including the trust accounting obligations, may give rise to an offence resulting in a substantial fine.
We may use our powers under the FMA Act 2011 for breaches by brokers and custodians, or under the Financial Markets Conduct Act 2013 for breaches by DIMS custodians.
If you provide a broking service or custodial service without being appropriately registered on the Financial Service Providers Register, you may be liable for up to 12 months imprisonment or a fine of up to $100,000 (for an individual) or up to $300,000 (for an business).
The FMA has wide powers to exempt persons or transactions from some financial markets law requirements. These powers enable us to remove rigidities in the law and ensure requirements for businesses are reasonable and cost-effective. We are aware that a number of issues may arise for market participants operating under the FMC Act regime, and exemptions may be required in some cases. Regulation updates section summarises the legislative notices we have issued to support the FMC Act regime.