Australia to remove exception for Retail Forex brokers using client money


negative balance protection

Breaking Forex News… Bringing their regulations regarding the safeguarding of client money up to par with other major jurisdictions including the US, Canada, and the EU, the Australian government announced today that it is going to change the rules as to what retail brokers offering over-the-counter derivatives products (read: Forex Brokers) can and cannot do with client money.

australiaUntil now, Australia has been one of the few properly-regulated countries which allowed Retail Forex brokers to make use of client money for things such as working capital, under certain conditions. However it looks like that exception is going to soon disappear, with all client money to now be held in trust.

The government plans to introduce the new legislation for parliamentary approval as soon as possible, but plans to give brokers one year to comply, as a transition period.

We had reported earlier that the issue had become something of a bone of contention between some of the leading domestic and international Retail Forex and CFD brokers serving Australian customers. However we understand that most of the major brokers on both sides got behind the move.

Kelly O'Dwyer, MP
Kelly O’Dwyer, MP

Australia’s Minister for Revenue and Financial Services Kelly O’Dwyer said in a statement on the matter:

The reforms fulfil the Government’s commitment, as part of its response to its root and branch examination of Australia’s financial system , to improve protections for client monies held in relation to derivatives, and to further enhance trust and confidence in the financial system.

This will ensure that retail clients are better protected when licensees, such as BBY, become insolvent.

The Government has conducted extensive consultation on the proposed regime, with almost 50 submissions received on the discussion paper and draft Bill. In addition, numerous consultation meetings have been held with a broad range of stakeholders, including industry associations, the Australian Securities and Investments Commission and the ASX. Consultation commenced in February 2016, and continued into October.  As a result, the Government is satisfied it understands the nature and scale of the regulatory impact and costs of these reforms.

While the Government acknowledges that the Bill may cause some disruption to firms that use a particular business model, the Government’s primary objective is to ensure the protection of retail client monies, and these reforms will achieve this objective.

The Bill will include a one year transition period to allow industry to adapt to the new regime.

The planned changes were cheered by Australia financial regulator ASIC. According to ASIC Commissioner Cathie Armour,

The reforms to the client money regime will strengthen protection of client money that is provided by retail derivative clients. By improving protection for retail client money, the reforms will help to increase investor confidence in the Australian financial system.

Importantly, the reforms will remove an exception in the client money regime that allows Australian financial services licensees to withdraw client money provided in relation to retail OTC derivatives from client money trust accounts, and use it for a wide range of purposes including as working capital. This exception currently places retail derivative client money at greater risk of loss, particularly in the event the licensee becomes insolvent.

Under the reforms, licensees would be required to hold retail derivative client money on trust. A fundamental protection of the trust requirement is that client money can be returned to clients, and not paid to creditors, in the event of the licensee’s insolvency. The requirement to hold client money on trust already applies to the vast majority of financial products and financial services under Australia’s client money regime.

ASIC also welcomed the Government’s decision to give ASIC the power to write client money reporting and reconciliation rules.

We will continue to follow this story as it develops, and as the planned bill is presumably passed into law in the coming months.

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Australia to remove exception for Retail Forex brokers using client money

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