An Inquiry Into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage

PART VIII - TREATMENT OF CLIENT FUNDS ACCOUNTS HELD AT FINANCIAL INSTITUTIONS

317. Media reports following the collapse of Access indicated that some clients of Access had been confused as to the status of funds deposited with Access because they received annual statements printed on Bank of New Zealand ("BNZ") letterhead and had client deposit cards that carried the BNZ logo.
318. This confusion may have been contributed to by the double branding of call accounts as BNZ accounts and Access accounts. After Access collapsed it became apparent that some clients of Access believed that they had funds held in their own name in trust accounts with the BNZ. The BNZ provided a trust account for Access clients to transact with Access. This was a pooled trust account, rather than many individual trust accounts.
319. In the course of its inquiry the Commission received evidence from Mr Rodrigues that Access had call account arrangements with the BNZ. In evidence Mr Rodrigues said that the cash management accounts were trust accounts. In the case of Access the inspection team did look at the processes and controls to administer these accounts. In evidence, Mr Rodrigues said:

Access said that these call accounts and cash management accounts were being audited by BNZ, so that was a great sort of comfort factor...

and later in evidence:

There was this client fund call account and then there are call accounts for each of the clients. So there was one common BNZ account, within which they had sub-client accounts...

320. The Regulations to the Business Rules required that firms:

Must obtain from the Bank holding the Client Funds Account a written acknowledgement of the trust status of the account, and must ensure that the words "Client Funds Account" appear in the title of the Clients Funds Account.

321. Mr Weldon noted that with a disclosure based regime, NZX is reliant on managing principals signing off on the correctness of information that they submit. Mr Weldon noted that a material fact of reliance is the declaration by the bank that the account for client funds is a trust account. Mr Weldon suggested that the bank has a monitoring role in relation to trust accounts and this is one aspect on which the compliance framework relies.

One of the other material facts of reliance is the fact that...the account at the BNZ, the declaration by the BNZ is actually that....the client trust account, the one account, is for client purposes and won't be used; both of those accounts are at the BNZ. Those guys sit on top of that data, see the electronic transfers on a daily basis, that's why they charge more for it, you know, managing a trust account than they do an established cheque account because there's supposed to be some other things that they do to monitor that. So you know there are a series of things upon which this structure relies.

Comment

322. Fundamentally, the responsibility lies with every investment broker to ensure that clients are clearly informed about money handling procedures, including whether client money will be held on trust, and the status of the funds. This is a requirement under the Investment Advisers (Disclosure) Act 1996. It is the responsibility of a broker to make sure that this information is not misleading. Certain money handling requirements are also set out under Rule 14.13 of the Participant Rules.
323. The NZX Business Rules required that client funds must be held on trust. Client assets are funds received and held on account. Client assets must be held by the firm on trust for its clients at all times. The responsibility of broker as trustee in relation to client funds should be real and apparent to clients. While in law a bank may in certain situations have responsibility as a constructive trustee if it is on notice of misdealing in trust account money, this does not detract from the primary responsibility of a broker, as trustee.
324. NZX has a statutory obligation to ensure that its markets are operated in accordance with its approved Conduct Rules. NZX may place reliance on factors such as acknowledgement that an account has the status of a trust account. It may place some reliance on monitoring carried out by a third party, including a bank that maintains a trust account. If it does rely on this, we consider the NZX should first receive some formal assurance from the third party that it is in fact conducting such a role.