.jpg)
ASIC has accepted an enforceable undertaking (EU) from City Index Australia Pty Ltd (CIA) following an ASIC surveillance which found deficiencies in its client money handling practices.
Under the EU, CIA must appoint an independent expert to review its business and develop a plan to rectify the deficiencies. The independent expert will report regularly to ASIC for the next 18 months on CIA’s implementation of the plan.
In October 2012, CIA paid two infringement notices issued by ASIC (refer 12-256MR). In November 2012, ASIC began an investigation of the business, focusing on the following deficiencies:
- weaknesses in its client money handling arrangements
- weaknesses in its controls to ensure compliance with its adjusted surplus liquid funds requirement
- weaknesses in change management
- inadequate oversight of outsourced functions
- an ineffective internal audit function
- weaknesses in its controls around its public statements
- inadequate training and education of staff, and
- ineffective internal reporting procedures to ensure timely escalation of issues to senior management.
ASIC Commissioner Greg Tanzer said this outcome comes as a result of recent work in the client money handling space.
‘ASIC warned the industry late last year that we expect issuers to know and understand their client money handling obligations, and to comply with them.
‘We are no longer facilitative in our approach to the regulation of client money handling practices and we will pursue issuers who fail to meet their obligations’, Mr Tanzer said.
ASIC acknowledges CIA’s cooperation in the matter.
Download the EU
Background
CIA operates a financial services business that enables investors to trade in over-the-counter (OTC) derivatives such as OTC contracts for difference and foreign exchange contracts. CIA holds an Australian financial services (AFS) licence that authorises it to deal and make a market in these derivatives. Under a condition of its AFS licence, CIA was required to comply with certain financial requirements. As an issuer of these financial products, CIA must also hold client money in accordance with the provisions of the Corporations Act 2001 (Cth) (Corporations Act).
Client money is money paid by investors to an Australian financial services licensee in connection with a financial product or the provision of a financial service, in this case, trading in derivatives in the OTC market.
The Corporations Act imposes a number of client money obligations including that client money must be paid into a particular type of account and must only be withdrawn and used as permitted by that Act.
Issuers of client money must also comply with the conditions of their AFS licence. Until 1 February 2013, operators of retail OTC derivatives businesses were subject to the AFS licence requirement to hold adjusted surplus liquid funds based on a proportion of their adjusted liabilities, with a minimum of $50,000. This requirement has now been superseded by tailored financial requirements for retail OTC derivatives issuers. These new requirements include a net tangible asset requirement based on the licensee's revenue (refer Class Order [CO 12/752] Financial requirements for retail OTC derivative issuers).
In December 2012 ASIC issued a report on client money handling practices in the contracts for difference and margin foreign exchange sectors (refer 12-298MR).
The report followed a risk-based surveillance of 40 issuers of OTC CFDs and margin FX contracts.
ASIC issued a media release at the mid-point of its surveillance that set out similar concerns to those included in the final report (refer 12-108MR).
In July 2010, ASIC released Regulatory Guide 212 Client money relating to dealing in OTC derivatives (RG 212). The guide provides an overview of the statutory client money provisions and in particular, the specific provisions that relate to derivatives.
