Consultation paper: Proposed transitional relief for non-NZX brokers to allow limited use of buffers

First published 21 February 2017

We are seeking views on a proposal for a class exemption from the Financial Advisers Act 2008 for non-NZX brokers.

The proposal is to exempt these brokers for a transitional period (until November 2020) from the requirement to keep client money and property in a separate account from their own money and property.

If granted, the exemption will enable these brokers to maintain a limited buffer of their own money in their client money trust account.

The purpose of the buffer must be to reduce the risk of a temporary shortfall that may prevent client transactions settling or result in one client’s funds being used to settle a transaction for another client.

We granted similar relief for brokers who are NZX-brokers in 2015. 

Submissions closed on Friday 17 March 2017.

If you have questions, please contact Lucy Ellis, senior solicitor, on 04 495 1682 or at [email protected].  Please title your e-mail ‘Consultation Paper: Proposed transitional relief for non-NZX brokers to allow limited use of buffers: [your organisation’s name]’.

Update

10 April 2017

Decision to grant exemption

We have decided to issue a limited transitional class exemption for non-NZX participant brokers from the Financial Advisers Act 2008 requirement that they keep client money and property separate from their own money and property. We plan to finalise and publish an exemption notice to give effect to this decision by mid-2017.

Nature of exemption

The exemption will allow non-NZX brokers to maintain a limited buffer of their own money in their client money trust account. They will be able to do this to reduce the risk of a temporary shortfall that may prevent client transactions settling or result in one client’s funds being used to settle a another client’s transaction. The exemption relief will apply for a transitional period until 30 November 2020, when the notice granting similar relief for NZX participants expires.

Conditions

The exemption conditions will largely reflect those consulted on. However we are considering:

• making some broker reporting requirements less frequent
• requiring brokers to tell us if they intend to rely on the exemption, and 
• (in view of feedback received in consultation) requiring brokers to submit an assurance report annually – not twice yearly as proposed in the consultation paper.

System and process changes expected

The segregation requirement provides an important protection for client money held by a broker in the event a broker becomes insolvent. Notwithstanding the exemption, brokers should still take steps now to implement changes to their systems, processes and business to eliminate (or if this is not possible reduce to the maximum extent possible) any shortfalls arising in client money. This exemption will provide additional time for non-NZX brokers to make the necessary changes, which should reduce overall compliance costs and business disruption.

Consideration of continued relief

Over the term of the exemption we intend to monitor and consider the extent to which shortfalls (and use of buffers) can be further reduced or eliminated. We will also consider whether there is any need for continued regulatory relief. We expect if any further relief is found appropriate, it would be considerably more limited and subject to tight controls.

In particular we will look into law change options beyond the extent of exemptions. In some overseas jurisdictions where limited buffers are permitted (subject to strict controls) we understand that the buffer becomes ‘client money’ under law when it is in the client money trust account. This provides protection for clients by effectively eliminating the commingling of broker and client money. A law change would be required to put this in place in New Zealand.