City Index Australia compliance failing investigated

Retail broker City Index Australia is set to appoint an independent adviser to review its business practices, after an investigation by local regulators found deficiencies in its practices for handling client funds.

The move marks the latest in a series of investigations into the management of client funds by retail brokers, in the wake of the collapse MF Global in 2011. The Australian Securities and Investment Commission (Asic), alongside the Monetary Authority of Singapore, have honed in on the practices of margin forex brokers, with the former having implemented new rules this year.

In a statement issued on April 10, Asic said the independent expert will develop a plan to rectify the weaknesses found and report back on changes made by City index Australia over the next 18 months. Asic's November investigation follows a fine of A$13,200 paid by City Index Australia in October, after the discovery of false or misleading statements made on its website.

Asic said that as a consequence, its November investigation focused on weaknesses in its handling of client money, compliance with capital requirements, change management, oversight of outsourced functions and internal audit function. Other areas also reviewed included controls around its public statements, staff education and training and internal reporting procedures.

"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," said Greg Tanzer, Asic commissioner in Melborne.

"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."

As a retail OTC derivatives broker, City Index Australia complies with the Australian financial services (AFS) licence requirement, which imposes client money obligations around account types and use of client funds.

Until February 1, operators of retail OTC derivatives businesses were also required to hold adjusted surplus liquidity based on a proportion of their adjusted liabilities, with a minimum of $50,000. This has since been superseded by tailored financial requirements for retail OTC derivatives issuers. New requirements now include a net tangible asset requirement based on the licensee's revenue.