Peter Townsend

Until recently SMSFs couldn’t buy wholesale financial products because ASIC had held they were retail investors unless they had at least $10 million of net assets.

ASIC has recently announced that it will loosen the constraints on SMSFs investing in wholesale products and make the test for eligibility easier to meet.

“It is somewhat curious that at the same time as ‘vested interests’ proclaim that SMSFs are investing in dangerous products and should have their activities curtailed (which translates as: only being able to invest with those same vested interests), ASIC is choosing to give SMSFs access to wholesale investments which don’t necessarily have the same suite of protections as there might be for retail investments.

“But that’s exactly what is happening,” said Peter Townsend, Principal, Townsends Business & Corporate Lawyers.

ASIC answered a FAQ way back in 2004 ‘QFS 150’: “When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client?”  ASIC answered ‘yes’.

What is a ‘retail client’? A ‘retail client’ is described in s.761G(1) of the Corporations Act 2001 (Cth) as any person (which includes a company and a person or company acting as a trustee) unless ss.761G(5), (6), (6A) or (7) applies.  These are the exceptions.

What is a ‘wholesale client’? S.761G(4) says that a financial product or a financial service is provided to or acquired by a person as a ‘wholesale client’ if it is not provided to or acquired as a retail client.  In other words the definition of ‘wholesale client’ is couched in the negative ie anyone that is not a retail client.

ASIC previously said that an SMSF can never be a wholesale client.  It took that view on a reading of s.761G(6) which relevantly says:

761G(6) – Superannuation products and RSA products

…..
(b)    if a financial service (other than the provision of a financial product) provided to a person relates to a superannuation product … the service is provided to the person as a retail client; and
(c)    if a financial service (other than the provision of a financial product) provided to a person who is:
(i)    the trustee of a superannuation fund … that has net assets of at least $10 million, or
(ii)    …
relates to a superannuation product … that does not constitute the provision of a financial service to the person as a retail client.

“ASIC adopted the somewhat tortuous view that the phrase “relates to a superannuation product” means every financial service provided to an SMSF because every such service ‘relates to a superannuation product’ ie the SMSF itself.

“Methinks the draftsperson of the legislation meant the phrase ‘relates to a superannuation product’ to refer to the investment being sold not the investor.  Nonetheless that’s been ASIC’s view for the last 10 years and SMSFs could not purchase investments that were not able to be bought by retail clients.

“With the change comes a new test.  The SMSF will now have to comply with the same eligibility tests as everyone else when it comes to deciding whether or not the investor is a wholesale client,” said Mr Townsend.

What are those tests?

EITHER they meet one of the six tests in s.761G(7), namely:

• product price exceeds $500,000
• product/service is used in connection with a business (but not a small business)
• for last 2 years the person has assets of more than $2.5 million (accountant’s certificate)
• for last 2 years the person has income of more than $250,000 (accountant’s certificate)
• person is acting for a trust but themselves meets any of the above tests, or
• person is a professional investor

OR they meet all of the tests in s.761GA, namely:

• their financial adviser is licensed
• he product is not insurance, super or RSA
• the product is not used in connection with a business
• the financial adviser is reasonably satisfied that the client is experienced in these products, and
• the adviser tells the client they are so satisfied and client acknowledges in writing

If the SMSF is not a retail client then the adviser does not have to provide a Financial Services Guide or a Statement of Advice and can offer products that themselves may not require prospectus-type disclosure.

The SMSF should ensure their investment strategy covers such products and that the trustee is not breaching their duty to members by investing in such a product.

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