AFCA argues few Aussie investors are ‘genuinely wholesale’

Speaking at a parliamentary joint committee on corporations and financial services inquiry hearing into the wholesale investor and wholesale client tests on Friday, lead ombudsman for investments and advice at the Australian Financial Complaints Authority (AFCA), Shail Singh, said AFCA can only investigate consumer harm related to wholesale clients where they have been misclassified.

“AFCA’s jurisdiction is limited to investigating and resolving complaints from retail consumers. This extends to issues with retail consumers that have been incorrectly classified as wholesale or sophisticated investors,” Singh said.

“However, where we see complaints from consumers that have been classified correctly as wholesale investors, we exercise our discretion to exclude those complaints from the AFCA service.”

Noting that the complaints authority is focused on the “harm that flows” from financial firms incorrectly applying the wholesale and sophisticated investor tests, he highlighted that since 2018, AFCA has only received around 140 complaints on this issue – just 0.6 per cent of all investments and advice complaints.

“AFCA’s experience is that current wholesale client and sophisticated investor tests play a fundamental role in the financial services law as they set the threshold where key consumer protections apply,” Singh said.

“They also operate as a barrier to entry for access to certain high-risk, complex products and wholesale investment markets. Relatively few Australian investors are genuinely wholesale investors, in our opinion, in the sense that they do not have the level of sophistication or the resources to understand the risks inherent in wholesale investments.

“We consider that the current retail, wholesale regulatory settings that are fit for purpose would include simple and easy to apply wholesale tests and clarify that the obligation should rest with the financial firm, not the investor, to determine whether a wholesale designation is appropriate individual investor.”

Responding to concerns from the committee that there has been misuse of accounting certificates that result in investors being wrongly classified as wholesale, Singh said advisers need to make sure their clients do fit the definition.

“We do take the view that the adviser … it’s not merely enough that they just look at the certificate and say, ‘Well, the $2.5 million mark’s being hit’, they still need to check this particular consumer understands the consequences of being classified wholesale. They have ethical duties to do so as well,” he said.

This stance is in line with the complaints body’s submission to the inquiry in May, in which it argued there needs to be “a high barrier to entry and restrictions into the wholesale client space”.

AFCA has not put a dollar amount on what the thresholds should be, however, 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.”