Government moves to protect client monies

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, today announced that the Government will proceed with reforms that will provide better protection for retail investors in over-the-counter derivatives products.

Australian financial service licence holders (Firms) can currently use money held on behalf of retail derivatives clients for a wide range of purposes, including for working capital. Use of client money for these purposes is either not permitted, or is more heavily regulated, in a number of other advanced G20 economies. Permitting the use of client money for these purposes therefore exposes Australian retail clients to a greater risk of loss in the event of the Firm’s insolvency.

As announced in the draft Bill released in February 2016, the new client money protection regime will remove the current exemption that permits a Firm’s use of retail client money, paid to the Firm for derivatives transactions. Prohibiting a Firm’s use of client money in this way will ensure that clients’ money is held in trust, and will be repaid to clients in the event of the Firm’s insolvency.

“The reforms fulfil the Government’s commitment, as part of its response to its root and branch examination of Australia’s financial system (Financial System Inquiry), to improve protections for client monies held in relation to derivatives, and to further enhance trust and confidence in the financial system,” Minister O’Dwyer said.

“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 Bill will be introduced at the earliest opportunity to enhance consumer protection.

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