AFCA cautions advisers on wholesale investor ‘grey area’

Alex Sidoti, senior ombudsman for AFCA, told ifa's sister brand SMSF Adviser that applying the general wholesale test could pose risks for advisers due to unresolved legal uncertainties within AFCA.

“Everyone needs to be aware that the risk is there until such time that it is resolved,” Sidoti said.

Sidoti explained a recent complaint to AFCA highlighted the issue, and disclosed there are upcoming determinations that are also likely to address “the grey area” between wholesale and retail clients.

The case in question involved a complaint to AFCA from the trustee of a corporate SMSF, who engaged a financial firm to provide advice and broking services. The trustee argued that the fund receiving the advice was a retail investor as it had less than $10 million in assets and was therefore entitled to the protections of the best interest duty.

On the other hand, the financial firm argued that the SMSF qualified as a wholesale client and that they only offered general advice. They contended that the trustee bore full responsibility for all investment decisions.

The firm was provided wholesale certificates from the trustee’s accountant stating the trustee had more than $2.5 million in assets or had otherwise met the income test of earning $250,000 for two consecutive years. This is regulated by section 761(G) s7 of the Corporations Act.

The trustee contested the financial firm's reliance on wholesale certificates, arguing that since the advice pertained to the investment strategy of a superannuation fund, the applicable test should have been under section 761G(6) of the Corporations Act, requiring the SMSF to hold $10 million in assets.

“The general wholesale test in chapter seven of the Corporations Act talks about the wholesale test that applies when a financial service does not relate to a superannuation product,” Sidoti said.

“If the advice does relate to a super product then the test to apply is different. It requires $10 million in assets for that client to be treated as a wholesale client.”

Sidoti said ultimately AFCA found that only general advice had been provided, therefore it was immaterial to determine if the SMSF was wholesale or retail.

However, she said this has been an area of ambiguity for some time, especially following guidance QFS150 published by ASIC several years ago that indicated the $10 million test is the most appropriate one to apply in this scenario.

“ASIC also stated it was not going to enforce this but flagged that advisers could face private action,” Sidoti said.

“The industry needs to be careful around this issue. AFCA has a couple of matters coming through that will go through to determination and hopefully, it will have to resolve the uncertainty and make a call, but ultimately it is up to licensees to make that call to see what their risk settings are.”