The issue of when a client is a retail or wholesale investor has been unclear for some years. Which is an important distinction given it determines the level of consumer protections, disclosure and access to some investments. The issue is even more unclear when it comes to entities such as SMSFs.
According to ASIC, when dealing in a financial services that 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.”
Alternatively, where a financial service doesn’t relate to a superannuation product the general test applies, which requires a qualified accountant to certify that the investor has “net assets of $2.5 million or if the value of the investment is at least $500,000”.
ASIC, in 2004, issued QFS 150 When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client? This document had said that, generally, financial services provided to a trustee of an SMSF would relate to a superannuation product, and so the “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”. However ASIC has now “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of when the trustee of a superannuation fund will be classified as a retail client or a wholesale client”, and withdrawn QFS 150.
ASICs “revised approach” is that it will not “take action” where either the general test or the net asset test is used to determine if an existing SMSF trustee is a retail or wholesale investor. However ASIC does note that this new approach 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.”
Also, ASIC will take action where clients are wrongly categorised as wholesale investors when they meet neither of the tests.
ASIC acknowledges the “legal uncertainty” surrounding this issue – pointing to the recommendation of the Senate Economics Reference Committee that the definition of retail and wholesale investors should be clarified, and so supports a review of the retail/wholesale investor tests so that they are “both clear and appropriate”.
The full statement can be found on the ASIC website: 14-191MR Statement on wholesale and retail investors and SMSFs.
Update: SPAA welcomes clarity around wholesale investor test
SPAA has welcomed the decision by ASIC to “clarify the working of the wholesale investor test and how it relates to SMSF professionals and trustees”.
According to the CEO, Andrea Slattery, SPAA has been working “long and hard” for clarity around the wholesale investor test, and the statement by ASIC “largely achieves this end”.
SPAA says the the previous position of ASIC had “created uncertainty”:
“SPAA strongly believed that the requirement that an SMSF had to hold $10 million of net assets was an incorrect interpretation when the advice was relevant to an investment being made by an SMSF trustee.”
However SPAA still believes there is “uncertainly about how the $2.5 million asset test applies to SMSF trustees”:
“ASIC’s statement says that the threshold applies ‘if the trustee has net assets of at least $2.5 million’. We need clarification from ASIC whether this means only assets in the SMSF, the member’s balance in the SMSF, and also includes the trustees’ personal assets outside superannuation.”
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