Under the Financial Advisers Act 2008 (FA Act) persons who held, transferred or made payments with client money or property on behalf of clients were referred to as brokers (or custodians). Under the new regime (Financial Markets Conduct Act 2013 (FMC Act)) persons who hold, transfer or make payments with client money or property, on behalf of clients, are referred to as a provider of client money or property services (provider). A person who holds client money or property continues to be referred to as a custodian but now also provides a client money or property service. More information regarding these changes and new terms are detailed below.
Who is a Client money or client property service provider?
A provider is defined as a financial services provider who holds, transfers or makes payments with client money or property. Client money or client property services is defined as the receipt of client money or property by a provider and includes custodial services. The full definition is set out in section 431W of the FMC Act.
The obligations of providers apply whether their services are to retail or wholesale clients. This includes custodians of client money and client property.
Client money is money received in connection with a financial advice product
Client property is property (other than money) that is a financial advice product or a beneficial interest in a financial advice product or received in connection with a financial advice product.
A ‘custodial service’ is provided if client money or client property is held by a person in trust for, or on behalf of, a client (or another person nominated by the client) under an agreement. The full definition is set out in section 431W of the FMC Act.
Who is not a Client Money or Client Property service provider?
A client money or property service is a regulated client money or property service if the exclusions (set out below) do not apply, and in that case, certain disclosure and conduct obligations will apply. Other disclosure, conduct and money handling obligations apply to all providers.
Client money or property service exclusions
Services given in course of carrying out other occupations or given in the ordinary course of the business for certain entities are not regulated client money or property services.
Lawyers, incorporated law firms, conveyancing practitioners, qualified statutory accountant, 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.
The simple transmission of a non-transferable instrument payable to another person is not considered to be a client money or property service
For a detailed list of those services and entities that are seen as not providing a regulated client money or property service please see clauses 19 to 23 of Schedule 5 of the FMC Act.
Custodians of financial products
Under the Financial Markets Conduct Amendment Regulations 2020 (FMC Amendment Regulations), regulations 229P to 229V apply to a person who provides relevant custodial services to a client.
These regulations do not apply to any of the following:
They hold client money or property solely for the purpose of completing a transaction, securing an obligation, or both.
The custodian and all their associates provide the services to no more than five clients in aggregate.
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.
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 in respect of a person's assets;
Discretionary investment management service (DIMS) custodians
Under the 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 FMC Amendment 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 FMC Amendment Regulations.
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.
Under the FMC Act, providers must comply with disclosure and conduct obligations.
Obligations relating to client money and client property services are set out in subpart 5B of Part 6 of the FMC Act, specifically sections 431V to 431ZJ.
As a provider you must exercise care, skill, and diligence. Client money must be paid into a separate trust account and client property must be held on trust. You will also need to keep records and report to clients.
For more detailed information on your obligations as a client money or property service provider refer to the client money and property services obligations page.
Custodians have their obligations set out in the FMC Amendment Regulations. Under these regulations, custodians have reporting, reconciliations, assurance engagement and general conduct obligations among others.
Who is responsible for client money and property service obligations and custodian obligations?
Where a provider provides client money or property services to the client, including custodial services, they must comply with all of the client money and property service obligations under the FMC Act and the FMC Amendment 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 client money or property service (including a custodial service that is subject to the custodian regulations) on behalf of the business of another person (Person B):
Person B (not Person A) is treated as the provider having the obligations, including any obligations under the FMC Amendment Regulations (see sections 431ZI of the FMC Act)
However, Person A will perform the requirements under the FMC Amendment Regulations, including reporting to clients and obtaining an assurance engagement.
Person B must ensure that Person A complies with the requirements of the FMC Amendment Regulations
Scenario 2: Where a share broker outsources the custody of shares to a custodian:
Both the share broker and the custodian will be providing client money or property services and both will need to be registered on the FSPR. See our registration page for more information. Custodians should choose the FSPR category 'Client money or property service (including custodial service)'.
The custodian is a 'custodian' as defined in the FMC Amendment Regulations.
If the custodian is providing the custodial service on behalf of the share broker’s business then the share broker has client money and property service obligations as a provider under the FMC Act and the custodian regulations.
However, because the share broker is not providing the custodial service, they are obliged to ensure that the custodian complies with the requirements of the custodian regulations, e.g. obtaining an assurance report.
This means where the custodian fails to perform their custodial services in accordance with the custodian regulations, then the share broker will be held responsible for failing to ensure that the custodian complied.
The share broker should ensure they properly supervise the custodian (or any other provider) that acts on behalf of the share broker’s business.
Legal arrangements between client money or property service providers and custodians should be clear if client money or property services are being provided on behalf of the other
Fair dealing obligations
The FMC Act sets out minimum compliance standards of behaviour for people operating in the financial markets.
misleading or deceptive conduct
false or misleading representations
offers of financial products in the course of unsolicited meetings.
Please contact us to report misconduct, make a complaint, or give us a ‘tip-off’.
Breaches & offences
Breaches of obligations relating to client money and client property services may lead to claims for compensation, action by the FMA or prosecution
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 an obligation, we may:
give direction orders,
go to the High Court to seek injunctions, banning orders, and prohibitions on the payment or transfer of money,
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 Financial Markets Authority Act 2011 or FMC Act for breaches by providers and custodians.
If you provide a client money or property 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 a business).
Find out more about our powers and our approach to enforcement.
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.