Lesley Thorne

Six different ‘wholesale client’ tests and three different ‘sophisticated investor’ tests currently apply to financial services clients and deciding whether self-managed superannuation fund (SMSF) trustees are wholesale or retail is fraught with difficulty according to The Fold Legal (The Fold).

“Get it wrong and advisers may breach the law,” says The Fold’s Senior Lawyer, Lesley Thorne.

While clients who are provided with financial services that relate to superannuation or retirement savings account (RSA) products are considered retail clients, there are some ifs, buts, maybes and considerable controversy about how the tests apply to SMSFs.

“Generally speaking, when a financial service that ‘relates to’ superannuation products is provided to an SMSF trustee, the trustee can generally only be treated as a wholesale client if the fund has assets of more than $10 million,” Ms Thorne says.

But even if the SMSF has less than $10 million in assets, in some circumstances, product providers can treat it as a wholesale client.

“If an SMSF has less than $10 million in assets but meets one of the wholesale client tests, it’s a question of control,” Ms Thorne says  “If the SMSF or someone who controls it meets one of the tests, product providers can treat the fund as a wholesale client when providing or issuing a financial product (although not a superannuation product).”

However, any one who provides any other financial service to the SMSF – for example, advice about the financial product or arranging for its acquisition – must treat the SMSF and its trustees as a retail client.

Ms Thorne warns that the question of who “controls” an SMSF is not straightforward because of the way that SMSFs are structured.

“If an SMSF has more than one member and trustee, the trustees must retain control and act in the interests of all members. This means that no one trustee controls the fund – and even a product provider cannot issue a product to such an SMSF as a wholesale client,” she says. “ Only a sole SMSF member who is also sole director and shareholder of its corporate trustee can be said to control an SMSF.

Ms Thorne says different views on the wholesale client tests are being relied on around the industry leading to an uneven playing field. “Our recommendation is, if you’re not sure, get specialist advice.”

The Fold has recently published a white paper Sophisticated, Wholesale … or Just Plain Retail? which comprehensively demystifies the wholesale client and sophisticated investor tests  – including their application to SMSFs.

To purchase the paper,  visit The Fold website.

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