ASIC’s statement on wholesale and retail investors and SMSFs

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ASIC has clarified how it will apply the wholesale investor test to self-managed superannuation funds (SMSFs).

This has been an area of ongoing legal uncertainty. The recent Senate Economics References Committee’s final report on the performance of ASIC recommended the Australian Government clarify the definitions of retail and wholesale investors. A 2011 Treasury options paper, Wholesale and retail clients: Future of financial advice, acknowledged the confusion about how the wholesale investor test applied in the context of superannuation trustees. ASIC is also aware of general uncertainty in the market about when a financial service relates to a superannuation product.

Relevant law

There are various tests for wholesale versus retail investors under the Corporations Act 2001 (Corporations Act). Wholesale clients may have access to a wider range of investments, but they do not enjoy all of the consumer protections that apply to retail clients.

Where the financial service relates to a superannuation product, a trustee of a SMSF will be classified as a retail client under the Corporations Act unless the fund holds net assets of at least $10 million at the time the service is provided.

If a financial service does not relate to a superannuation product, the general test for determining whether the trustee is a retail or wholesale client applies under the Corporations Act. Under the general test the circumstances in which the trustee will be a wholesale client include if the trustee has a certificate from a qualified accountant stating they have net assets of $2.5 million or if the value of the investment is at least $500,000.

ASIC’s review of QFS 150 ‘When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client?’

In 2004, ASIC issued QFS 150 When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client? (QFS 150). QFS 150 gave guidance stating that a financial service would generally relate to a superannuation product in a situation where financial services were provided to the trustee of a SMSF (meaning the $10 million net asset test would apply and the trustee would be classified as a retail client if it did not satisfy this test).

Given ongoing legal uncertainty about when a financial service relates to a superannuation product, ASIC has reviewed its interpretation of when the trustee of a superannuation fund will be classified as a retail client or a wholesale client and withdrawn QFS 150.

ASIC’s revised approach

ASIC’s revised approach means that, for example, where the trustee of an existing superannuation fund receives advice about how to invest the fund’s assets, ASIC will not take action if the person providing the advice determines whether the trustee is a wholesale client based on the general test mentioned above (e.g. if the trustee has net assets of at least $2.5 million), rather than applying the higher $10 million net asset test. ASIC will adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund.

Although ASIC will not take action where such financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test), this will not affect any private rights of action that may be available to third parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks.

ASIC acknowledges that legal uncertainty – particularly in relation to an issue as important as whether clients should receive the benefit of the retail client consumer protections – is undesirable and supports a review of the test to ensure that it is both clear and appropriate.

Given the importance of the retail client consumer protections, ASIC will take regulatory action where financial service providers miscategorise their clients and, for example, treat investors as wholesale clients based on net assets of $2.5 million without a certificate from a qualified accountant.

Consumers should be cautious when making investments with retirement savings and should always seek appropriate information and advice before making an investment decision.

Guidance for investors on managing their super is available on ASIC’s MoneySmart website.

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