Hattrick for ASIC: Three Large Firms Censured For Incorrect Handling Of Client Funds

Australia's national regulatory authority ASIC has today announced that it has censured three large firms for failing to adhere to

Commercial entities within the electronic trading sector which seek to defile funds which are held on behalf of clients have been the subject of ever decreasing circles when it comes to regulatory leniency during recent times.

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Australia, one of the world’s most stable jurisdictions in which to carry out FX business, as well as being an attractive location from which to serve clients in the Asia-Pacific region, has demonstrated that its regulatory authority, ASIC, stands to ensure misconduct of this type is deterred, and if it occurs, duly rectified.

Today, some of the nation’s larger institutions have been at the center of announcements by ASIC that enforcement action has been taken against them, including Macquarie Bank, Commonwealth Securities (CommSec) and Ausiex.

Macquarie Bank Failed To Segregate $23 Million

ASIC today announced that Macquarie Bank has paid a penalty of $175,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (MDP). The penalty was for failing on two separate occasions, to deposit a total of $23 million (being $14 million and $9 million respectively), received from a Client into Client accounts maintained by Macquarie Bank, and designated as Clients’ segregated accounts.

The specific circumstances which surround this infringement began in late 2012, at a time when Macquarie re-opened a client account and, according to findings by the MDP, failed to segregate the funds in the required manner.

The sequence of events began on October 3, 2012, when Macquarie re-opened  the above-mentioned Client Account (Account B) for a Client (Macquarie Client). At that time, Macquarie Bank failed to designate Account B as a segregated Client Account.

A week later, on October 8, 2012, Macquarie Bank set up further Client Accounts for the Macquarie Client by cloning Account B. The cloning of Account B resulted in the establishment of another Client Account (Account A) for the Macquarie Client. Macquarie Bank also failed to designate Account A as a segregated Client Account.

Subsequently, on October 10, 2012, Macquarie received $14 million from the Macquarie’s Client intended for Account A, but which was deposited by Macquarie into the Macquarie’s non-segregated House Account (Contravention 1). The next day, Macquarie Bank received $9 million from the Macquarie Client intended for Account B, but which was deposited by Macquarie into the Macquarie non-segregated House Account (Contravention 2).

On October 12, 2012, Macquarie Bank’s failure to designate Account A as a segregated Client Account was identified and corrected. Notwithstanding this, according to ASIC’s MDP inquiry into the matter, Macquarie Bank made no enquires to establish whether the Macquarie Client’s money had been affected by the failure to designate Account A as a segregated Client Account on October 8, 2012.

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Macquarie Bank took similar action on October 15, 2012, however this time pertaining to Account B, whereby the company’s failure to designate that particular account as a segregated Client Account was identified and corrected. In the same vein however, the company also made no enquiries to establish whether the Macquarie Client’s money had been affected by the failure to designate Account B as a segregated Client Account on October 3, 2012.

On 17 October, 2012, Macquarie Bank’s futures division enquired with Macquarie Bank’s finance division about a $23 million movement from non-segregated House Accounts to segregated Client Accounts in the futures balance sheet. The explanation provided was that the error resulted from the redesignation of Account A and Account B to segregated Client Accounts on the 12th and 15th of October, 2012 respectively. Notwithstanding this, Macquarie made no enquiries to establish whether the Macquarie Client’s money had been affected by the failure to designate Account B and Account A as segregated Client Accounts on 3 and 8 October 2012 respectively.

Finally, on October 25, 2012, $23 million (comprising the $14 million and $9 million received by Macquarie from the Macquarie Client on October 10 and 11, 2012 respectively) was moved from Macquarie’s House Account into the Macquarie Client’s segregated Client Account after a discrepancy was noted by a Macquarie Bank delegate and escalated to senior management.

An important factor which the MDP took into consideration with regard to issuing a financial penalty on this matter, is that according to its findings, Macquarie Bank was aware of the discrepancy at the time of occurrence, but it took until October 25 for the company’s delegate to escalate it to senior management, therefore causing ASIC to rule that the misconduct was allowed to continue unrectified over an unacceptable length of time.

Australia’s Largest Retail Broker Enters Enforceable Undertaking

In addition to the penalty received from Macquarie Bank, ASIC yesterday announced that it has applied enforcements to another large institution, along with its subsidy.

The regulatory authority, in this case, has accepted an enforceable undertaking (EU) rather than applied a financial penalty, from Australia’s largest retail broker Commonwealth Securities Ltd (CommSec), and Australian Investment Exchange Ltd (Ausiex), both of which are members of the Commonwealth Bank of Australia group.

With the methods that these entities used in which to handle client funds having caused the regulator to intervene, the EU has been applied stipulating that the firms must appoint an independent expert to review their handling of client money and develop a plan to rectify any deficiencies found in their client money processes. The independent expert will report to CommSec and Ausiex by mid-2014, following which CommSec and Ausiex must provide and implement a remediation plan if the independent expert report makes recommendations to do so.

ASIC acknowledges that CommSec and Ausiex completed a remediation program in late 2012 to address weaknesses in their client money-handling arrangements. Those weaknesses related to withdrawing client money from trust accounts without the required written authorizations and failing to separate client money from CommSec’s and Ausiex’s money. ASIC considers it appropriate to seek the view of an independent expert to evaluate the controls and processes of CommSec and Ausiex in relation to the handling of client money.

Under the law, licensees must keep client money separate from their own. This is an important safeguard to protect the interests of retail investors. For example, if there are failings in the handling of client money, the client’s money may be at risk if a firm becomes insolvent, and clients may suffer losses.

ASIC has publicly acknowledged that CommSec and Ausiex have cooperated and worked constructively with the regulator in agreeing to the terms of this EU. CommSec and Ausiex have also worked constructively with ASX, which given this EU, is not intending to take further enforcement action in relation to the potential breaches.

The method of rectifying irregularities in corporate operations by insisting that a company enters an EU is favored by ASIC, and has been applied to other companies in its jurisdiction such as Halifax Securities and City Index’s Australian operations earlier this year. In doing so, the enforcement of adherence to regulatory rulings by compliance departments are emphasized, and therefore an effective means of ensuring company procedure is kept up-to-date and maintained as a rule of thumb can be achieved, without detriment to the company concerned or its clients.

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