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Wholesale and retail investors and SMSFs — ASIC revises its stance

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.

The question — which net asset test to apply?

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:

  • where the financial service is deemed to relate to a superannuation product, the SMSF trustee holds net assets of at least $10 million at the time the service is provided; or
  • where the financial service is deemed not to relate to a superannuation product:
    • the value of the investment or product to which the financial services relate is at least $500,000 (Investment Test); or
    • the SMSF trustee provides a certificate from a qualified accountant confirming they:
      • have net assets of at least $2.5 million (Net Assets Test); or
      • have had a gross income of at least $250,000 in the previous two financial years (Income Test); or
    • the person is a 'professional investor' as defined in the Act.

Why does it matter?

The distinction between a retail client and a wholesale client can be important for a number of reasons, some of which include:

  • wholesale clients may have access to a wider range of investments or financial products;
  • wholesale clients do not enjoy all of the consumer protections that apply to retail clients;
  • where a managed investment scheme is limited to only wholesale clients:
    • the scheme avoids the need to be registered;
    • the scheme operator avoids the need for an AFS licence authorisation to conduct the scheme; and
    • the scheme operator avoids the need to prepare a product disclosure statement; and
  • wholesale clients are not required to receive a financial services guide or personalised statement of advice.

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's answer since 2004

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 withdrawn QFS150

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:

  • where the value of the investment or product to which the financial services relate is at least $500,000; or
  • the SMSF trustee provides a certificate from a qualified accountant confirming the trustee has net assets of at least $2.5 million.

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'.

All clear? Not quite

Private rights against financial services providers

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.

Some legal ambiguity not clarified

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:

  • whether an individual who does not meet the Net Assets Test by reference to assets in their own name:
    • may seek to include assets of an SMSF of which they are an individual trustee; and
    • if so, whether all the assets of the SMSF are included, or only those attributable to the individual's account; and
  • whether an SMSF with net assets of less than $2.5 million may seek to include assets which are in an individual's name, where that individual is also an individual trustee of the SMSF.

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:

  • financial services providers seeking to rely on the Net Assets Test or the Income Test should, at the very least, ensure that they obtain the relevant certificate before determining that the SMSF trustee is a wholesale client; and
  • accountants asked to provide relevant certificates in accordance with the Net Assets Test or the Income Test should consider the issues identified above and seek advice if they have any doubt as to which assets/income they are to include in determining whether the relevant threshold is met.

Ensure certificates are in order

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:

  • because the financial services provider has not properly applied the general tests in the Act; or
  • where the financial services provider relies on the tests without a certificate from a qualified accountant.

More information from Maddocks

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.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of professional adviser topics.

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Lawyer in Profile

Julia Tonkin
Julia Tonkin
+61 3 9258 3318

Qualifications: BA, LLB, University of Melbourne

Julia is a Partner in Maddocks Corporate and Private Clients team. Julia has extensive expertise in:

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  • charities and not-for-profit space.

Julia’s clients include high net worth individuals and families and privately held businesses.

Clients value Julia’s empathic, common sense yet technically sound approach to complex legal (and often interpersonal) issues.

She has been recognised as an Accredited Specialist by The Law Institute of Victoria with an accreditation in Wills & Estates Law. She has also been recognised in Doyles Guide for Wills, Estates & Succession Planning Law Recommended – Victoria in 2023.

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