When licensed firms hold assets on behalf of their clients, it is crucial to implement strong mechanisms to safeguard clients’ interests. This concept is enshrined in both European and domestic legislation and is further enforced by the Malta Financial Services Authority when supervising licensed firms such as financial institutions and banks.
Understanding the Safeguarding of Client Funds
The safeguarding of client funds refers to the implementation of appropriate mechanisms adopted by firms to protect assets entrusted to them by their clients. The main goal of such mechanisms is to ensure that clients’ funds are not used for any purpose other than those designated by the client. This typically involves procedures to separate client funds from the firm’s operational finances, ensuring that in the event of the firm’s insolvency or significant financial difficulty, the client funds remain secure and cannot be claimed by the firm’s creditors.
Best Practices for Safeguarding Client Funds
- Segregated Accounts: One of the foremost measures in safeguarding clients’ assets is the adoption of segregated accounts specifically designated for holding clients’ funds. Firms should implement an evaluation process when identifying credit institutions to maintain these accounts.
- Regular Reconciliation Procedures: Firms should carry out regular reconciliation procedures, cross-checking client account balances with the firm’s internal financial records at regular intervals. This helps maintain the integrity and accuracy of the safeguarding mechanisms in place.
- Periodic Audits: Conducting both internal and external audits is essential. Internal audits provide a continuous check on the safeguarding processes, allowing firms to address any discrepancies or weaknesses before they become significant issues. External audits, conducted by independent third parties, offer an additional layer of oversight and help demonstrate to regulators that the firm is in full compliance with its obligations.
Upcoming Legislation: PSD3 and PSR
On 8th of June 2023, the European Commission published proposals for the Third Payment Services Directive (PSD3) and the Payment Services Regulation (PSR). These proposals aim to harmonise the interpretation of rules across member states, combat payment fraud, improve the functioning of open banking, and reinforce the enforcement powers of national competent authorities. Although there is no definite timeline for the implementation of these proposals, it is suggested that they will take effect around 2026.
How ARQ Can Help
As a multi-disciplinary firm, ARQ offers comprehensive solutions to help businesses meet safeguarding requirements, including:
- Gap Analysis and Audits
- Compliance Services
- Training and Support
- Risk Solutions
By implementing these best practices and staying ahead of upcoming legislation, firms can ensure the safety of their clients’ funds and maintain trust in their services.
For more information, please contact Dr Denia Ellul – Director – ARQ Advisory Ltd, ARQ Corporate Ltd and ARQ Fiduciaries Ltd.
Denia Ellul
Director of ARQ Advisory Ltd, ARQ Corporate Ltd and ARQ Fiduciaries Ltd.
A lawyer by profession, Denia attended the University of Malta and successfully completed a Bachelor of Laws degree, followed by a Doctor of Laws degree in 2014. Following her graduation from the University of Malta, Denia commenced her employment with a local law firm which helped her gain the necessary knowledge in various fields of law, including corporate and commercial law, cross-border tax planning and financial-legal matters.
