AFCA puts onus on advisers for wholesale investor status

In a submission to the parliamentary joint committee on corporations and financial services inquiry into the wholesale investor and wholesale client tests, the Australian Financial Complaints Authority (AFCA) has pushed for “a high barrier to entry and restrictions into the wholesale client space”.

While AFCA was unwilling to put a dollar amount on what the thresholds should be, it was clear that financial advisers and financial firms more broadly cannot simply rely on “passive acceptance” of investor attestations.

“Regardless of where the threshold is ultimately set, it is essential that the adviser retains the records and responsibility for proactive engagement and discussion with their client as to their retail/wholesale status,” AFCA said in its submission.

“We note earlier reviews contemplated regulatory settings involving upfront client consents excluding future access to [internal dispute resolution] and to AFCA. Such an approach would shift the onus from the financial firm – who is best placed to make the assessment and understand the implications of wholesale designation – to the consumer/investor.”

The complaints authority said that from its perspective, the context of how each individual client consent is sought and obtained determines whether a particular consumer “genuinely understood the implications of and agreed to their classification”.

“If some form of consent model were contemplated, it is essential that it does not preclude investors from access to IDR and EDR. A decision or assessment about whether a client meets the definition of a wholesale client should not be left to investor attestations and passive acceptance by the advice provider or responsible entity,” it said.

“Such a decision should be an active decision following an appropriate engagement and assessment with the financial firm maintaining appropriate records.

“This assists financial firms to satisfy themselves that they have complied with their obligations and supports any future assessment by AFCA of its jurisdiction and to identify any substantive issues about the consent or whether the client met the relevant wholesale test. It also supports AFCA’s systemic issues role to identify and report any systemic issues we identify in complaints handling to the regulators.”

Higher barrier to entry

According to AFCA, the current operation of the wholesale tests does not present a “material barrier” to Australian investors investing in “complex, risky products and bearing both the up and downside risks where they are in line with their risk appetite and tolerance”.

“Under the current tests, there is a very real risk that retail investors can readily access high risk, complex and /or leveraged products that are not suitable for them,” AFCA said in its submission.

It added: “For the minority of genuinely wholesale investors, we support settings that clearly and simply establish the threshold.

“We recognise that changing policy settings change incentives and have observed how fixed monetary limits can deliver perverse outcomes.

“For example, we have seen cases where the $500,000 investment limit under the ‘general test’ has incentivised firms to recommend investments larger than they may otherwise have, simply to gain wholesale access.”

AFCA explained that an investor’s “financial tolerance for loss” is a vital consideration for any changes to the wholesale investor tests, however it stopped short of offering any figures.

“While AFCA does not have a view on the appropriate increased monetary limit under an updated test, we do not support inclusion of the family home or superannuation,” it said.

“The policy rationale for the wealth test is that an investor has sufficient assets behind them to recover from any losses. We do not consider a threshold that puts the family home or retirement funds held in the regulated superannuation system at risk, to be an appropriate one.”

This is in line with the majority of other submissions to the inquiry, with both the Financial Advice Association Australia and the Financial Services Council pushing for the primary residence to either be removed from consideration in the net asset threshold or accounted for with a large increase to the test.