In a recent submission to the Quality of Advice Review, the SMSF Association has made a wide range of recommendations for improving the advice sector.
One of the recommendations is for a comprehensive review of the sophisticated and wholesale investor regime.
The SMSF Association stated that increased compliance burden and significant red tape is encouraging advisers to utilise the wholesale and sophisticated investor regime.
“This is of deep concern and should be viewed as a significant red flag. It is a ‘canary in the coal mine’ moment for the advice sector,” the submission warned.
“Advisers should not be incentivised to shift clients away from a regime which contains vital consumer protections.”
The current framework is complex, the submission noted, and the use of accountant’s certificates has significantly increased.
“The use of this regime for the sole purpose of minimising the compliance burden for advisers is not appropriate,” it stated.
“This raises concerns as to whether its use is appropriate and if clients are being properly informed and able to provide true informed consent. Focus should therefore be given to alleviating the barriers to providing professional advice.”
The submission also flagged concerns about the appropriateness of the threshold test or income test as a measure to classify an individual as a sophisticated investor.
“The level of a person’s wealth is not an indicator of their financial literacy, sophistication, or skill,” it noted.
There is also a lack of clarity around how the rules of the wholesale investor regime apply in an SMSF context, it stated.
“Appropriate guidance is severely lacking. Indeed, there are differing legal opinions on the operation of these rules where an SMSF is involved,” the Association stated.
While the application of the $2.5 million net asset test to SMSFs is based on ASIC Media Release 14-191 MR, the submission noted this has not been tested in court.
The submission argued that the use of accountant’s certificates does not align with the core principles that apply to the provision of financial advice.
“An unlicensed accountant is unable to provide financial advice and is unable to provide any advice in relation to the proposed investment in a specific product,” it stated.
“However, an adviser can rely upon a certificate from an unlicensed account to classify a client as a sophisticated investor and therefore a wholesale investor, removing significant consumer protections in the process.”
The submission also expressed concerns about some of the issues that can arise for accountants who are also licensed and approached by a client to complete an accountant’s certificate.
“As we have noted, already there are significant challenges for this cohort in separating tax and accounting advice or services from licensed services. The concessions afforded to unlicensed accountants under the Corporations Regulations 2001 do not extend to an accountant that is licensed,” the Association explained.
“Of concern is any potential litigation risk that may arise if a certificate is given in the capacity of the qualified accountant, but they do not apply their licensing obligations in making further enquiries or counselling the client.”
The SMSF Association said that both licensed and unlicensed accountants are being placed in an “untenable position”.
“We have observed a significant increase in enquiries from members regarding the use of accountants’ certificates, particularly since the commencement of the design and distribution (DDO) and target market determination (TMD) obligations came into effect in October 2021,” it stated.
“It would appear the use of these certificates is the preferred option of many licensees due to the perceived shifting of risk away from the licensee and adviser. Advisers should be responsible for the advice and services they provide to their clients.”
Can someone point out what a client gets from the current retail advice disclosure regime that a wholesale client doesn’t? There is a lot of talk about the “consumer protections afforded” but I really think this is a perception rather than a reality. In any event, the Licensee gets pinged by all clients regardless of their advice category and if anything, the implications can be more severe with a wholesale client complaint due to the quantum of the dollars involved.
Regardless of the presentation of an Accountant’s Certificate, a SMSF member is treated as retail for member advice unless the fund has >$10m in assets. So all those “beneficial” retail disclosures come into play when the member needs advice about adding to, or deducting from, their balance. It gets worse when the advice is to start a pension – ASIC considers it is necessary, in all cases, to provide a cashflow statement – so the paperwork piles up and the real advice gets buried somewhere below the weight of the disclaimers etc.
Agree an accountant isn’t necessarily the best professional to sign a certificate confirming someone’s wealth under the balance sheet test however, they have good visibility under the income test. Admittedly, the later is used less often than the balance sheet threshold.
Regardless, the Accountant’s Certificate is a good start. It is prepared by someone not providing financial advice – independent – however, it should only be the first cog in the wheel to being classified as a wholesale client. Once the adviser has the client and their certificate in front of them, there should be a qualitative assessment as to the financial literacy of the individual that is relevant to the type of advice the adviser will be providing. An assessment of appropriate financial literacy could be different between licensees due to the differing suite of advice services on offer. Same individual, holding the same Accountants Certificate, but not necessarily classified as a wholesale client by all advice licensees.
Accountant’s that are licensed, should straddle the same conflict of interest dilemma’s that advisers do. Does an in-house service result in the client’s best interests being paramount?
When in doubt, refer to another firm. Having a qualitative test in addition to the quantitative one currently in place would alleviate the conflicts of licensed accountants providing they genuinely exercised professional judgement in accordance with the Code of Ethics.
As much as accountants hail their profession as a road well worn in the professionals game, one wonders then why the regulators considered it necessary to separate SMSF Auditors from the business services functions. Was that perhaps because self interest was winning the conflicts dilemma?