ASIC has recently clarified its approach on the application of the wholesale investor test to self-managed superannuation funds (SMSFs).
ASIC's announcement resolves some uncertainty around how the wholesale investor test will be applied where financial services are provided to SMSF trustees. This clarification is welcome news for financial advisers and clients alike.
There is, however, some unresolved ambiguity about how the test is applied.Steven Tang, Maddocks Lawyers
The distinction between a wholesale client, and a retail client in financial services law is an important one. Given that a key purpose of financial services laws is consumer protection, the level of regulation (or 'regulatory intensity') is much higher where organisations are dealing with retail clients, compared to those organisations who deal with wholesale clients.
While there are many different categories of wholesale client, the most common assessment made in day to day financial services is one which organisations make about their prospective client's gross income and net assets.
There has been ongoing legal uncertainty about when a financial service provided to an SMSF trustee 'relates to a superannuation product'. This distinction impacts on whether an SMSF trustee is classified as a retail client or a wholesale client under the general tests in the Corporations Act 2001 (Cth) (Act). Under these tests, an SMSF trustee will be a retail client unless:
The distinction between a retail client and a wholesale client can be important for a number of reasons, some of which include:
The importance of the distinction is also borne out in the fact that most of the reforms introduced as part of the Future of Financial Advice legislation only apply to retail clients (see an ealier ClearLaw article titled 'FoFA Update: FoFA reforms take effect, likely to survive' for the latest on the FoFA reforms).
ASIC had previously provided guidance in Frequently Asked Question QFS150 'When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client?'.
The guidance stated in part that a financial service would generally 'relate to a superannuation product' in a situation where financial services of any kind were provided to an SMSF trustee.
This position meant that any financial services providers who treated SMSF trustees as wholesale clients, where the SMSF trustee had net assets of less than $10 million, were at risk of ASIC regulatory action.
ASIC has now reviewed its interpretation of the relevant provisions and withdrawn QFS150.
ASIC's revised approach suggests that it will not take action against a person providing a financial service to an SMSF trustee where the person providing the financial service determines the SMSF trustee is a wholesale client based on the general tests in the Act and specifically including:
In other words, just because a financial service is being provided to an SMSF trustee, does not on its own mean that the service 'relates to a superannuation product'.
While ASIC has confirmed that it will not take action where financial services are provided to an SMSF trustee and the provider has determined the trustee is a wholesale client, ASIC notes that its interpretation does not restrict any private rights of action which may be available to a third party.
The Corporations Regulations 2001 (Cth) (Regulations) expressly extend the operation of the Net Assets Test and Income Test to include assets or income not only of the individual concerned, but of companies and trusts that the individual controls. One consequence of this is that it is uncertain:
ASIC has provided no guidance on how to resolve these uncertainties. In each case the specific circumstances will need to be considered alongside the relevant provisions of the Act and Regulations.
Additionally, although the Regulations provide guidance on when a person 'controls' a trust, it will not always be a simple exercise in the case of an SMSF where there are 2 or more members. One would need to look at the SMSF's trust deed and, if it has a corporate trustee, the constitution of that corporate trustee.
Given these issues:
There is a clear rider to ASIC's media release of which financial services providers must be mindful. ASIC has stressed that it will take regulatory action where a client is miscategorised as a wholesale client.
This may occur:
For questions or more information about the above article, please call Maddocks on (03) 9258 3555 and ask to speak to a member of the Financial Services and Revenue team.
You can read earlier ClearLaw articles on a range of professional adviser topics.
Kate is a lawyer in Maddocks General Commercial Team. Kate joined the firm in 2010 as a paralegal and was admitted to practice in December 2012.
Kate has been involved in acting for a range of commercial, government and professional industry clients.
Her areas of expertise include:
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