Lesley Thorne

Financial advisers and accountants who provide certificates for limited recourse borrowing arrangements may inadvertently provide credit advice in breach of the National Consumer Credit Protection Act 2009 and for which they may not be insured. 

Senior lawyer at The Fold Legal (The Fold), Lesley Thorne says SMSF clients seeking to enter a limited recourse borrowing arrangement are frequently asking their adviser or accountant to complete a certificate from the lender in order to confirm they have advised the client about the terms, risks, impact or effect of the loan, as well as its suitability for them and their ability to meet repayments. 

“Unless the adviser or accountant holds an Australian Credit Licence or is a Credit Representative of a licensee, it is an offence to provide ‘credit assistance’ or ‘act as an intermediary’ in relation to consumer credit,” Ms Thorne says. “This means that if the client’s loan is consumer credit and the adviser or accountant isn’t licensed or authorised, they can only provide the client and their lender with factual information.” 

Ms Thorne says where the trustees of an SMSF are individuals, a limited recourse borrowing arrangement will be consumer credit if it is to purchase, renovate or improve residential property for investment purposes. “Because the objective of an SMSF is to provide retirement funds for members, a property purchase or renovation by the SMSF will always be for investment purposes,” she says. “This means that a loan provided to SMSF trustees who are individuals intending to purchase/renovate property will be consumer credit.” 

Where a loan is to purchase a different type of asset or the SMSF has a corporate trustee it won’t be considered consumer credit, Ms Thorne says. “Advisers and accountants still need to be wary in this area though as providing advice on the loan or a certificate to the lender could still overstep their professional boundaries, leaving them vulnerable to claims by a client or a lender that aren’t covered by their professional indemnity insurance.” 

Ms Thorne’s tips for advisers and accountants when they are asked to provide an advice certificate for a client are:

• Do read the certificate carefully – understand what you are being ask to certify
• Don’t certify that you have provided advice that you are not authorised or qualified to provide, or haven’t in fact provided
• Don’t provide certification as to the suitability of a loan or a client’s ability to repay it – it is the lender’s responsibility to assess this
• Do strike through any sections that contain anything other than factual information 

Ms Thorne says it is a complex area, so if in doubt, advisers and accountants should speak to their compliance officer or seek legal advice.

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Lesley Thorne

Advisers sometimes refer to their clients as sophisticated clients, but this term is often misunderstood according to The Fold Legal.

Senior Lawyer at The Fold Legal, Lesley Thorne says there is no such thing as a sophisticated client, only a sophisticated investor. “A sophisticated investor is a person with sufficient experience in using financial products and services,” she said. “Their experience means they don’t need the information usually contained in a product disclosure statement or the standard protection available to retail clients.”

Ms Thorne says for financial advisers to treat someone as a sophisticated investor, an Australian Financial Services (AFS) licensee must be satisfied that their knowledge and experience makes them sophisticated. “To call someone a sophisticated investor is a big call, as the client might later claim that they weren’t that experienced,” she said. This can put the licensee at risk if they didn’t comply with all the retail client obligations.

People often confuse the sophisticated investor test with other wholesale client tests such as the asset and income test or the product value test, Ms Thorne says. “It’s confusing because for corporate fundraising, the sophisticated investor tests mirror the wholesale client tests that apply to financial services.”

As a general rule, Ms Thorne says advisers should remember that for financial services (i.e not fundraising), the sophisticated investor test only applies to financially experienced clients and can only be used by an AFS licensee (i.e. not an authorised representative). Clients who meet the asset and income tests aren’t necessarily sophisticated investors, but they will be wholesale clients.

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Lesley Thorne

Advisers have until 12 March 2014 to ensure their privacy compliance measures meet new privacy principles.

“The new Australian Privacy Principles require personal information to be handled in an open and transparent way,” says Lesley Thorne, senior lawyer from The Fold Legal. “This means financial advisers must be revisiting and updating their privacy compliance measures over the next three weeks.”

In particular, Ms Thorne says the information given to clients about how their information is to be used should be reviewed and the extra information required for data collection statements should be added when collecting information, be it face-to-face or by telephone.

“Privacy policies should also be updated and placed on advisers’ websites,” she says. “Care needs to taken with direct marketing and advisers must make sure they have a really simple way for people to unsubscribe or opt out of any communications.”

If any personal information is disclosed overseas, the recipient must be required to protect that information in a similar way to the Australian requirements. “If not, advisers should stop sending information overseas until they can put controls in place over how their client data is used, disclosed and stored,” she says.

Ms Thorne has the following tips for advisers in the lead up to the 12 March deadline.

Tips for advisers:

• Implement new procedures to ensure you handle personal information correctly and give access when required by law.
• Correct personal information which is inaccurate, out of date, incomplete, misleading or irrelevant when requested.
• Check that security and storage processes for personal information are sufficient.
• Expand internal complaints resolution arrangements to include complaints about privacy.

“Advisers need to thoroughly train their staff on their obligations and also the privacy policy and procedures they have put in place to manage the obligations. They need to monitor and record any mishaps and ensure adjustments can be made quickly where necessary.”

The Fold has new privacy policies, privacy scripts and documented policies and procedures advisers need as a starting point in The Fold’s manuals. For more information, click here.

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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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