Client money or property services provider

Financial products custodians

Under the Financial Markets Conduct Amendment Regulations 2020 (FMC Amendment Regulations), regulations 229P to 229V apply to a person who provides relevant custodial services to a client.

These regulations do not apply to any of the following:

• They hold client money or property solely for the purpose of completing a transaction, securing an obligation, or both.
• The custodian and all their associates provide the services to no more than five clients in aggregate.
• They are a trustee of a family trust for the trust's assets.
• They are an executor, an administrator or a trustee of a deceased person's estate.
• They are an attorney acting under an enduring power of attorney for a donor's property in circumstances where the donor becomes mentally incapable.
• They are appointed by the court in respect of a person's assets;
• A sub-custodian acting in that capacity.

Discretionary investment management service (DIMS) custodians

Under the FMC Act a financial services provider who holds client money or property in relation to discretionary investment management services (DIMS) is a DIMS custodian. DIMS custodians are also subject to the FMC Amendment Regulations.

Client money and property held for a retail DIMS must be held by a custodian who is independent of the DIMS provider, except where the client money and property is held directly by the client. The FMA, may in limited circumstances, allow the use of an associated part custodian. 

Managed investment scheme (MIS) custodians

Under the FMC Act, a financial service provider who holds the property of a managed investment scheme is an MIS custodian.

For managed investment scheme property, MIS custodians are not custodians under the FMC Amendment Regulations.  

However, MIS custodians have similar obligations under the FMC Act for that property, including meeting the standard of care, skill and diligence required, holding scheme property on trust, record keeping and reporting.

A provider is defined as a financial services provider who holds, transfers or makes payments with client money or property. Client money or client property services is defined as the receipt of client money or property by a provider and includes custodial services. The full definition is set out in section 431W of the FMC Act.

What has changed? 

Under the Financial Advisers Act 2008 (FA Act) persons who held, transferred or made payments with client money or property on behalf of clients were referred to as brokers (or custodians). Under the financial advice regime (Financial Markets Conduct Act 2013 (FMC Act)) persons who hold, transfer or make payments with client money or property, on behalf of clients, are referred to as a provider of client money or property services (provider). A person who holds client money or property continues to be referred to as a custodian but now also provides a client money or property service. More information regarding these changes and new terms are detailed below.

The obligations of providers apply whether their services are to retail or wholesale clients. This includes custodians of client money and client property.

• Client money is money received in connection with a financial advice product
• Client property is property (other than money) that is a financial advice product or a beneficial interest in a financial advice product or received in connection with a financial advice product.

Client money or property service is a regulated service if any exclusions do not apply (see exclusions) certain disclosure and conduct obligations will apply. Other disclosure, conduct and money handling obligations apply to all providers.

Exclusions  

Services given in course of carrying out other occupations or given in the ordinary course of the business for certain entities are not regulated client money or property services. These include:

• Lawyers, incorporated law firms, conveyancing practitioners, qualified statutory accountant, tax agents, real estate agents and registered legal executives providing a service in the ordinary course of their business.
• Licensed derivatives issuers. They are subject to separate obligations.
• Employers offering employees financial products such as employee share purchase schemes.

The simple transmission of a non-transferable instrument payable to another person is not considered to be a client money or property service

For a detailed list of those services and entities that are seen as not providing a regulated client money or property service please see clauses 19 to 23 of Schedule 5 of the FMC Act.

If you're providing client money or client property services, you are required to be registered on the Financial Service Providers Register (FSPR) to legally provide financial services to clients in New Zealand. 

Levies

The Financial Markets Authority (Levies) Regulations 2012 (the Regulations), as amended in 2020 and 2022, set out the levies payable by industry. The levies are set by the Ministry of Business, Innovation, and Employment (MBIE).

The FMA receives funding from the Crown and a proportion of our costs is recouped from industry through levies.

Levy Classes

A financial markets participant falls within one or more levy ’class’, depending on what financial services they provide.

• A levy must be paid for every levy class the financial markets participant falls within. Levies are payable on the relevant leviable event as described in column 3 of Schedule 2 in the Regulations.
• Some levy classes have been split in order to recognise the variations in size and nature of different financial market participants.
• Most levies are paid when making an annual confirmation to the Registrar of Financial Service Providers (the Registrar).
• Most levies are payable to the Registrar, via the (FSPR). However, some levies are payable directly to the FMA. This is set out in column 4 of Schedule 2 in the Regulations.
• The following levy classes are invoiced directly by the FMA:
• Levy Class 8, Levy Class 8A, Levy Class 10, Levy Class 10A, Levy Class 13 and Levy Class 16.

Levy Class description

The table below provides a high-level description of each levy class. For the full description of levy classes, see Schedule 2 in the Regulations. 

Offences

It is the responsibility of each financial service provider to ensure they are registered for the service(s) they provide and have paid the appropriate levies. As part of their online annual confirmation to the Registrar, they must select all of the applicable classes to determine the levies payable and confirm the information they have provided is true, correct and complete.

Under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the FSP Act) it is an offence to:

• provide services you are not registered for or state you are registered for a particular financial service when you are not
• make a representation relating to any document or information required by the FSP Act or its regulations knowing that it is false or misleading, or omit any matter knowing such omission is false or misleading.

These offences could result in a fine of up to $100,000 and/or imprisonment for individuals, and a fine of up to $300,000 for businesses.

It is also an offence under the FSP Act to fail to notify the Registrar if any of the details contained on the FSPR are no longer correct. Failure to notify could result in a fine of up to $10,000.

Levy waivers

We have discretionary power to waive a levy (in whole or part).

We will only do so if we are satisfied that the circumstances or characteristics of the financial markets participant are exceptional when compared with the circumstances or characteristics of others in the same class, so that it would make it inequitable for the person to pay the levy. The threshold is deliberately high.

The waiver power is not intended to be used to revisit settled policy positions.

Once we receive a waiver application and the fee, we will assess it.  If we decide to grant the waiver, we must notify our decision in the Gazette, and publish the decision and reasons for it on our website.

How to apply for a levy to be waived

You will need to email the following information to [email protected] with the subject line ‘Levy waiver application’.

• Name of person or entity applying for the waiver.
• Contact person for correspondence concerning the application including address, phone number and email.
• Indicate the persons/entity who will receive the benefit of any waiver granted.
• Specify which class(es) you seek a waiver from and whether a waiver is sought from the full levy or part and the amount thereof.
• Let us know your preferred date for any waiver to take effect.
• Explain why the waiver should be granted and why your circumstances are exceptional when compared with others in the same class.
• Provide all relevant facts in support of your application.
• Explain any regulatory benefit of FMA granting the waiver.
• Give details of any previous contact with officials (including their names) at FMA or MBIE (including the Companies Office) on the matter.

How to pay your waiver application fee

You can pay by electronic deposit or internet banking. Payment can be made by applicants or law firms making applications on behalf of their clients.

The person paying the application fee must be the person who pays the subsequent fees and costs. For example, if a law firm pays the application fee, that law firm must also pay any additional fees and costs.

We recommend if law firms apply for waivers on behalf of their clients, the parties discuss and agree who will be responsible for paying the FMA’s fees before submitting a waiver application.

* This is the name of the person paying the application fee. This person will be invoiced for any subsequent fees and costs. Payment by credit card is not available for this application process.

What are the fees

• A payment of $1,265 should accompany each application.
• This covers the application fee of $115 set out in the Financial Markets Authority (Fees) Regulations 2011 and an advance of $1,150 (including GST) for fees and costs to be incurred.
• These regulations set out charging rates of $230 (including GST) per hour for time spent by FMA Board members and $178.25 (including GST) per hour for time spent by FMA staff.
• These regulations are set by MBIE.

How long does it take

• Once we have been provided with all relevant information, it generally takes around six weeks to process an application.
• This may be longer if any policy questions arise.
• If your application is urgent, please provide the date you need the decision by.
• You must also provide reasons for requesting urgent consideration.

Granted waivers

• Southern Cross Benefits Limited – partial waiver – May 2015
• Craigs Investment Partners Self-Select Schemes - waiver of part of the FMA levy – Oct 2016 Expired
• i-Select Superannuation Scheme - waiver of part of the FMA levy – Nov 2016 Expired
• Portfolio Superannuation Fund - waiver of part of the FMA levy – Nov 2016 Expired
• Craigs Investment Partners Self-Select Schemes - FMA levy waiver - Oct 2018
• i-Select Superannuation Scheme - levy waiver notification – Nov 2018
• Portfolio Superannuation Fund - levy waiver notification – Nov 2018
• KiwiWRAP KiwiSaver Scheme - Sept 2020

Under the FMC Act, providers must comply with disclosure and conduct obligations. Obligations are set out in subpart 5B of Part 6 of the FMC Act, specifically sections 431V to 431ZJ.

Those providing client money or property services must also comply with other laws, including:

• Financial Markets Conduct Amendment Regulations 2020 (if applicable)
• Financial Service Providers (Registration and Dispute Resolution) Act 2008 
• Where applicable – section 446 of the FMC Act

As a provider, you must exercise care, skill, and diligence. Client money must be paid into a separate trust account and client property must be held on trust. You will also need to keep records and report to clients.

Custodians have their obligations set out in the FMC Amendment Regulations. Under these regulations, custodians have reporting, reconciliations, assurance engagement and general conduct obligations among others.

General conduct

The general conduct obligations (sections 431ZA – 431ZB of the FMC Act) apply to all regulated client money or property services.

These obligations require you to:

• exercise care, diligence and skill
• not receive client money or property for the acquisition of any financial product if the relevant offer contravenes any financial markets legislation.

Handling client money and property

Obligations for handling client money and property, require providers to:

• hold client money and property on trust for the client
• pay client money into a trust account at a bank in New Zealand (or into any other prescribed entity)
• properly account for client money and property held
• keep clear trust account records that meet certain conditions
• report on client money or property
• only apply client money or property as expressly directed by your client.

See sections 431ZC – 431ZH of the FMC Act for more information. 

Under regulations 229X, regulations 229Y – 229ZC applies to the holding of client money or property together with other money or property for the purposes of s431ZC(3) and (4) of the Act.

These obligations apply to:

• regulated client money or property services provided to retail clients
• certain limited wholesale clients – see regulation 229W of the Financial Markets Conduct Amendment Regulations 2020.
• retail or wholesale investors under a retail DIMS (see section 446 of the Financial FMC Act).

These obligations do not apply to certain money received by brokers who the Insurance Intermediaries Act 1994 applies. This is because alternative provisions apply under that Act (see section 431Z(2)(d) of the FMC Act).

If a provider uses a wrap platform, client money and client property obligations may also apply (regardless of the wrap provider’s obligations and FSPR registration). A provider’s obligations will depend on contractual arrangements with the portfolio administration service provider and structure of that service (in particular, consider section 431ZI).

Disclosure

Disclosure obligations regarding client money or property services provided to retail clients can be prescribed under section 431X.

Sufficient information should be given to each client to enable them to make an informed decision about whether to use your services.

In exercising the care, diligence and skill required, certain information should be disclosed, including:

• any material interests or relationships you have
• your procedures for handling client money or property
• any criminal convictions or civil or disciplinary proceedings you (or your principal officers) have.

You must disclose your fees and other remuneration payable (directly or indirectly) by clients for your services. In particular, you must obtain your client's consent to any direct or indirect remuneration you will earn from their money or property (see section 431ZG of the FMC Act).

Custodian obligations

Custodians are providers under the FMC Act regime and must comply with the relevant client money and property service obligations.

Certain client money or property service obligations under subpart 5B of the FMC Act apply to a DIMS licensee.  In addition, custodians have their obligations set out in the Financial Markets Conduct Amendment Regulations 2020 *. Those obligations relate to the following matters.

Reporting

A custodian must provide prescribed information to a client relating to client money or property held on behalf of the client or transactions relating to client money or client property.

Custodians must send a report to clients about their money and property held at least every six months.  The report must include details of transactions carried out during the reporting period.

Alternatively, that information can be provided to the client using an electronic facility if certain conditions are met, e.g. that the information is available on a substantially continuous basis and the client has agreed to the information being provided in that way.

Reconciliations

Custodians must reconcile records of client money and property and must promptly and fully rectify any discrepancies. Records of client money must be reconciled daily. The frequency of the reconciliation must be appropriate to the type of client property, how frequently the client property is traded, and the timing of any custody reports provided.

Assurance and reports

Under the Financial Markets Conduct Amendment Regulations 2020 custodians have reporting, reconciliations, assurance engagement and general conduct obligations among others.

Within 4 months of their accounting period’s close, custodians must obtain and receive an assurance report from a qualified auditor.

The assurance report must include an opinion of whether the custodian's processes, procedures and controls are suitably designed to meet the control objectives in regulation 229V(2).

The auditor’s report must also state whether the controls and processes operated effectively throughout the accounting period. The report should include detail of the controls and the auditor’s findings (including management response).  The report should specify that the FMA is an intended user of the report.

The custodian must submit the assurance report to us at [email protected] within 20-working days of receiving it from the auditor. Custodian’s requirements for reporting and reconciliations are in addition to any existing provider obligations that may apply.

* Note: 

• Where a person (Person A) provides the client money or property service (including a custodial service that is subject to the custodian regulations) on behalf of the business of another person (Person B):
• Person B (not Person A) is treated as the provider having the obligations, including any obligations under the FMC Amendment Regulations (see sections 431ZI of the FMC Act)

Monitoring compliance

We monitor and visit selected providers to assess their compliance under:

• Financial Markets Conduct Act 2013 
• Financial Markets Conduct Amendment Regulations 2020
• Financial Service Providers (Registration and Dispute Resolution) Act 2008

Our monitoring will be risk-based and generally focus on outsourcing oversight, reconciliations, record keeping and reporting. This includes:

• how a provider chooses and oversees custodian activities
• how a custodian chooses and oversees sub-custodian activities
• reconciliations of internal and external records
• segregation of roles
• how you have assured your compliance, for example through an internal or external review.

Compliance

Where a provider provides client money or property services to the client, including custodial services, they must comply with all of the client money and property service obligations under the FMC Act and the FMC Amendment Regulations.  This includes the requirement to report to clients and to obtain an assurance engagement.  See Scenario 1 which clarifies this.

Scenario 1: Where a person (Person A) provides the client money or property service (including a custodial service that is subject to the custodian regulations) on behalf of the business of another person (Person B):

Person B (not Person A) is treated as the provider having the obligations, including any obligations under the FMC Amendment Regulations (see sections 431ZI of the FMC Act)

However, Person A will perform the requirements under the FMC Amendment Regulations, including reporting to clients and obtaining an assurance engagement.

Person B must ensure that Person A complies with the requirements of the FMC Amendment Regulations.

Scenario 2: Where a share broker outsources the custody of shares to a custodian:

Both the share broker and the custodian will be providing client money or property services and both will need to be registered on the FSPR. See our registration page for more information.  Custodians should choose the FSPR category 'Client money or property service (including custodial service)'.

The custodian is a 'custodian' as defined in the FMC Amendment Regulations.

If the custodian is providing the custodial service on behalf of the share broker’s business then the share broker has client money and property service obligations as a provider under the FMC Act and the custodian regulations.

However, because the share broker is not providing the custodial service, they are obliged to ensure that the custodian complies with the requirements of the custodian regulations, e.g. obtaining an assurance report.

This means where the custodian fails to perform their custodial services in accordance with the custodian regulations, then the share broker will be held responsible for failing to ensure that the custodian complied.

The share broker should ensure they properly supervise the custodian (or any other provider) that acts on behalf of the share broker’s business.

Legal arrangements between client money or property service providers and custodians should be clear if client money or property services are being provided on behalf of the other.

Fair dealing

The FMC Act sets out minimum compliance standards of behaviour for people operating in the financial markets.

It prohibits:

• misleading or deceptive conduct
• false or misleading representations
• unsubstantiated representations
• offers of financial products in the course of unsolicited meetings.

Where a provider provides client money or property services to the client, including custodial services, they must comply with all of the client money and property service obligations under the FMC Act and the FMC Amendment Regulations.  This includes the requirement to report to clients and to obtain an assurance engagement.  See Scenario 1 which clarifies this.

Scenario 1: Where a person (Person A) provides the client money or property service (including a custodial service that is subject to the custodian regulations) on behalf of the business of another person (Person B):

Person B (not Person A) is treated as the provider having the obligations, including any obligations under the FMC Amendment Regulations (see sections 431ZI of the FMC Act)

However, Person A will perform the requirements under the FMC Amendment Regulations, including reporting to clients and obtaining an assurance engagement.

Person B must ensure that Person A complies with the requirements of the FMC Amendment Regulations.

Scenario 2: Where a share broker outsources the custody of shares to a custodian:

Both the share broker and the custodian will be providing client money or property services and both will need to be registered on the FSPR. See our registration page for more information.  Custodians should choose the FSPR category 'Client money or property service (including custodial service)'.

The custodian is a 'custodian' as defined in the FMC Amendment Regulations.

If the custodian is providing the custodial service on behalf of the share broker’s business then the share broker has client money and property service obligations as a provider under the FMC Act and the custodian regulations.

However, because the share broker is not providing the custodial service, they are obliged to ensure that the custodian complies with the requirements of the custodian regulations, e.g. obtaining an assurance report.

This means where the custodian fails to perform their custodial services in accordance with the custodian regulations, then the share broker will be held responsible for failing to ensure that the custodian complied.

The share broker should ensure they properly supervise the custodian (or any other provider) that acts on behalf of the share broker’s business.

Legal arrangements between client money or property service providers and custodians should be clear if client money or property services are being provided on behalf of the other.

Breaches and offences

Breaches of obligations relating to client money and client property services may lead to claims for compensation, action by the FMA or prosecution.

Compensation

Claims may arise from clients for compensation for losses incurred as a result of a breach or breaches, including the duty to exercise required care, diligence and skill.

Action by the FMA

If you breach an obligation, we may:

• give direction orders,
• go to the High Court to seek injunctions, banning orders, and prohibitions on the payment or transfer of money,
• issue temporary banning orders in some circumstances.

Prosecution

Breaches, including the trust accounting obligations, may give rise to an offence resulting in a substantial fine.

We may use our powers under the Financial Markets Authority Act 2011 or FMC Act for breaches by providers and custodians.

If you provide a client money or property service or custodial service without being appropriately registered on the Financial Service Providers Register, you may be liable for up to 12 months imprisonment or a fine of up to $100,000 (for an individual) or up to $300,000 (for a business).

Find out more about our powers and our approach to enforcement.

The FMA has wide powers to exempt persons or transactions from some financial markets law requirements. These powers enable us to remove rigidities in the law and ensure requirements for businesses are reasonable and cost-effective. Find out more about exemptions you can apply for under the FMC Act. 

View current exemption notices