Investment platforms, financial advisers, custodians and other ‘client money or property service’ providers will have to more clearly disclose interest margins and ensure clients receive relevant reporting under updated guidelines released for consultation late in September.
The Financial Markets Authority (FMA) has clarified a range of obligations for various entities captured under the money-holding rules in the revised guidance including disclosure of interest earned from client cash.
Many entities in the investment chain such as brokers, advisers, platforms and custodians collect interest on client cash as it wends through the system with some pocketing some, or all, of the proceeds.
The new FMA guidance, which updates the previous 2014 edition, says any firms taking a cut of interest earned on client money must be upfront about the rationale for such deductions and the quantum involved.
“Before a margin can be deducted, it must be expressly, clearly and unambiguously disclosed in the relevant agreement between provider and client, as the law requires providers to obtain the necessary informed consent from the client before making such deductions,” the guidance says.
Businesses caught by the rules must express “clear and unambiguous disclosure requires stating the value of the margin (e.g. as a dollar amount or percentage of interest earned), and the purpose for which the margin is taken”.
“Additionally, the purpose for which the margin is taken must be associated with the services provided to the client,” the FMA says.
In the low-rate era interest earned on client cash held in trust by brokers or platforms, for instance, has naturally declined.
However, interest income from client money is likely cushioning some company profits as rates spike higher.
Among a raft of other money-holding duties including cyber-security and third-party due diligence, the new FMA guide says firms must deliver investment reports to underlying clients at a verified physical address (or secure online location) independent from the providers.
“To ensure there is a definitive and independent record of the client’s investment holdings, the nominated person must be independent from the transactions that are being reported on – i.e. not the financial adviser, the provider, or wrap provider/platform involved in the transaction. Custodians should ensure any changes made to client details continue to reflect this requirement, and that existing client information is amended if necessary,” the regulatory guide says.
“We are aware of at least one instance where a financial adviser directed that a significant number of client reports be sent to his or associated entity addresses. While the clients may have agreed to this, our view is that it may facilitate the potential for fraud (as it did in this case), as clients do not have an independent record of transactions relating to their money and property, and must rely on information from the adviser.”
Submissions close on November 1.
During a consultation-heavy period, the FMA is also seeking feedback on proposed regulations for Financial Market Infrastructure (FMI) providers.
The NZ government passed legislation last year introducing a new regulatory framework for systemically important FMIs, an eclectic group that includes “payment systems, securities settlement systems, central securities depositories, central counterparties, and trade repositories”, according to the Reserve Bank of NZ (RBNZ).
In a large cache of documents (notably, a 129-page exposure draft), the FMA and RBNZ, which will jointly oversee the regime, detail how the proposed rules will function in practice while asking for industry feedback on issues such as transitional period, alignment with offshore regulations and apportion of risk among firms based on size.
“We do not believe there should be two levels of requirements in New Zealand,” the consultation document says. “We also consider that having graduated requirements would make the New Zealand regulatory regime confusing and unnecessarily complex for both regulated entities and for participants of FMIs.”
The proposal also lays out conflict-of-interest and carve-out plans for the RBNZ, which is both a FMI and regulator of the regime.
While the RBNZ must consider the government’s 2022 Financial Policy Remit – covering factors such as climate change and cyber-resilience – when setting the FMI rules, the consultation offers some relief.
“Sustainable house prices are not relevant to the FMI Standards,” the proposal says.
The FMI consultation period ends on November 18.