Classifying SMSF customers wrongly as ‘retail’ or ‘wholesale’ could have dire consequences for both clients and advisers, warns a financial legal advice firm.
Whether or not someone should be classified as a retail or wholesale client is confusing and fraught with danger. An adviser could even breach the law should they get it wrong, The Fold’s senior lawyer Lesley Thorne tells Wealth Professional.
While the Corporations Act gives a convoluted definition of the two terms, there is no blanket definition. Six different ‘wholesale client’ tests and three different ‘sophisticated investor’ tests currently apply to financial services clients – and deciding which SMSF trustees are wholesale or retail is particularly tricky because of the way it is structured, Thorne says.
“It’s a very complicated topic and certainly what we’ve discovered is there are many within the industry who are applying the test in slightly different ways because it’s so complicated. It’s quite a minefield.”
Whether an SMSF client is retail or wholesale depends on factors such as the value of product or service, or level of experience they have with dealing with financial products.
“Every client needs to be assessed on a case by case basis to determine precisely what type of client they are,” Thorne says.
Clients are essentially required to be treated as retail unless they fall within one of the specific descriptions of wholesale clients which are in the Corporations Act.
There are a number of different tests that clients and financial services providers can use to determine whether they are classed as wholesale.
An SMSF trustee can generally only be treated as a wholesale client if the fund has assets of more than $10 million, 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.
“The reason it’s important it that if a client is a retail client, there are certain consumer protections within the Corporations Act which financial services provider needs to meet. So for example, they must provide them with certain disclosure documents about any problems with what they might be purchasing," she says.
“So if a financial services provider gets the classification incorrect and treats them as wholesale when they are really retail then they are likely to be breaching all of those consumer protection provisions.”
Thorne says different views on the tests are held around the industry, which has caused an uneven playing field. She recommends getting specialist advice if you are unsure.
The Fold has recently published a white paper Sophisticated, Wholesale ... or Just Plain Retail?
, which demystifies wholesale, retail and sophisticated investor tests, including their application to SMSFs.