Alex Sidoti, senior ombudsman for AFCA, told 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.”
Unfortunately, there is a low level of understanding of the intersection of the Corps Act with SMSF as it applies to wholesale versus retail. The Corps Act states that financial product advice to a member of a superfund is retail advice unless the fund has $10m in assets.
Although an APRA fund will generally satisfy this asset level, a member will always be treated as retail when receiving super advice. That is the easy bit for most interpreters of this.
As for SMSFs, the member and the trustee are different roles and there can be a distinction between whether advice is retail or wholesale.
Advice concerning the SMSF as a whole is provided to the trustee and, if they otherwise qualify as wholesale under s761G(7), they can receive the advice as a wholesale client. The main advice provided at trustee level is investment advice, but there are also a range of other administrative and structural items that can be provided to the trustee. Good practice would ensure the trustee accepts the classification. Where a SMSF has assets less than $10m, advice to the member about their own interest is at the retail level. That is, contribution, pension and lump-sum advice for example. Death benefits, rollovers and fund exit are all member advice and will be under retail if the SMSF has less than $10m. So you can end up with a hybrid and care is required to ensure the advice is targeted at the correct role – remembering the member trustee obligation in a SMSF doesn’t merge the role of member and trustee. The roles remain separate.
Where a SMSF has $10m, all advice can be done at the wholesale advice level. Again, informed consent is best practice.
The difference between the situation for APRA Funds is structural – a member of an APRA fund will always be provided advice at the member level. Advice is never provided to the trustee of a APRA fund. In the normal course, only the member can request an action of the trustee (ATO Release Authorities are a notable exception).
So a disenfranchised member of a SMSF that goes to AFCA has to find a way of meeting AFCAs categorisation of complaints it can, and will, hear.
Disclaiming wholesale classification seems to be the main path however, AFCA will generally dismiss the application where the advice firm can provide solid evidence of the clients engagement as a wholesale client. Beware if the client file records are less than complete.
As a matter of process – AFCA has stated that where an AFSL is registered with AFCA – that is they provide retail advice – then an application from a wholesale client will be considered, but that doesn’t necessarily lead to them adjudicating the complaint. So many SMSF advice firms will be registered with AFCA and therefore, following well documented processes will assist in these types of disputes. Where a firm is not required to be registered with AFCA, the client has no recourse to AFCA.
It does however seem unusual to see this type of complaint going to AFCA, generally the advice firm just deals with these issues via their internal complaints process as time, and reputational aspects over-ride the “soundness” of the complaint.
More broadly, if a person is able to be willingly classified as a wholesale client why then does their financial decision making skill lesson for particular types of advice? I would argue, understanding investment advice is no less complex than superannuation strategy advice and, although they are in different roles as trustee and member, they are ultimately the same person with the same capacity for taking on information and making informed decisions. A part of setting up a SMSF is driven by the desire to self manage and actively engage. This is very different from the average APRA fund member.