Client money or property services provider

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.

These include:

• 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.

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;
• A sub-custodian acting in that capacity.

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.

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.

The general conduct obligations (sections 431ZA – 431ZB of the FMC Act) apply to all regulated client money or property services.

These obligations require you to:

• exercise care, diligence and skill
• not receive client money or property for the acquisition of any financial product if the relevant offer contravenes any financial markets legislation.

Obligations for handling client money and property, require providers to:

• hold client money and property on trust for the client
• pay client money into a trust account at a bank in New Zealand (or into any other prescribed entity)
• properly account for client money and property held
• keep clear trust account records that meet certain conditions
• report on client money or property
• only apply client money or property as expressly directed by your client.

See sections 431ZC – 431ZH of the FMC Act for more information. 

Under regulations 229X, regulations 229Y – 229ZC applies to the holding of client money or property together with other money or property for the purposes of s431ZC(3) and (4) of the Act.

These obligations apply to:

• regulated client money or property services provided to retail clients
• certain limited wholesale clients – see regulation 229W of the Financial Markets Conduct Amendment Regulations 2020.
• retail or wholesale investors under a retail DIMS (see section 446 of the Financial FMC Act).

These obligations do not apply to certain money received by brokers who the Insurance Intermediaries Act 1994 applies. This is because alternative provisions apply under that Act (see section 431Z(2)(d) of the FMC Act).

If a provider uses a wrap platform, client money and client property obligations may also apply (regardless of the wrap provider’s obligations and FSPR registration). A provider’s obligations will depend on contractual arrangements with the portfolio administration service provider and structure of that service (in particular, consider section 431ZI).

Disclosure obligations regarding client money or property services provided to retail clients can be prescribed under section 431X.

Sufficient information should be given to each client to enable them to make an informed decision about whether to use your services.

In exercising the care, diligence and skill required, certain information should be disclosed, including:

• any material interests or relationships you have
• your procedures for handling client money or property
• any criminal convictions or civil or disciplinary proceedings you (or your principal officers) have.

You must disclose your fees and other remuneration payable (directly or indirectly) by clients for your services. In particular, you must obtain your client's consent to any direct or indirect remuneration you will earn from their money or property (see section 431ZG of the FMC Act).

Custodians are providers under the FMC Act regime and must comply with the relevant client money and property service obligations.

Certain client money or property service obligations under subpart 5B of the FMC Act apply to a DIMS licensee.  In addition, custodians have their obligations set out in the Financial Markets Conduct Amendment Regulations 2020 *. Those obligations relate to the following matters.

Reporting

A custodian must provide prescribed information to a client relating to client money or property held on behalf of the client or transactions relating to client money or client property.

Custodians must send a report to clients about their money and property held at least every six months.  The report must include details of transactions carried out during the reporting period.

Alternatively, that information can be provided to the client using an electronic facility if certain conditions are met, e.g. that the information is available on a substantially continuous basis and the client has agreed to the information being provided in that way.

Reconciliations

Custodians must reconcile records of client money and property, and must promptly and fully rectify any discrepancies. Records of client money must be reconciled daily. The frequency of the reconciliation must be appropriate to the type of client property, how frequently the client property is traded, and the timing of any custody reports provided.

Assurance and reports

Under the Financial Markets Conduct Amendment Regulations 2020 custodians have reporting, reconciliations, assurance engagement and general conduct obligations among others.

Within 4 months of their accounting period’s close, custodians must obtain and receive an assurance report from a qualified auditor.

The assurance report must include an opinion of whether the custodian's processes, procedures and controls are suitably designed to meet the control objectives in regulation 229V(2).

The auditor’s report must also state whether the controls and processes operated effectively throughout the accounting period. The report should include detail of the controls and the auditor’s findings (including management response).  The report should specify that the FMA is an intended user of the report.

The custodian must submit the assurance report to us at compliance@fma.govt.nz within 20-working days of receiving it from the auditor. Custodian’s requirements for reporting and reconciliations are in addition to any existing provider obligations that may apply.

* Note: 

• 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)

We monitor and visit selected providers to assess their compliance under:

• Financial Markets Conduct Act 2013 
• Financial Markets Conduct Amendment Regulations 2020
• Financial Service Providers (Registration and Dispute Resolution) Act 2008

Our monitoring will be risk-based and generally focus on outsourcing oversight, reconciliations, record keeping and reporting. This includes:

• how a provider chooses and oversees custodian activities
• how a custodian chooses and oversees sub-custodian activities
• reconciliations of internal and external records
• segregation of roles
• how you have assured your compliance, for example through an internal or external review.

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.

The FMC Act sets out minimum compliance standards of behaviour for people operating in the financial markets.

It prohibits:

• misleading or deceptive conduct
• false or misleading representations
• unsubstantiated 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’.

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

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

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.

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.