Speaking at recent event, SMSF Association policy manager Tracey Scotchbrook said the association has seen a significant uptick in queries relating to wholesale and sophisticated investors and the definitions for those since October 2021.
“I don’t think it’s any coincidence that we saw some substantial legislative changes in the financial advice space at that time including the obligations around design and distribution, target market determinations and breach reporting,” Ms Scotchbrook said at the recent SMSF Association Technical Summit.
“Almost simultaneously, our technical research service started to be flooded with queries around SMSFs and the sophisticated investor rules and the use of accountant certificates.”
In the context of SMSFs, Ms Scotchbrook said the sophisticated and wholesale investor space is one that needs to be approached with caution.
“It’s not as straightforward as you might think. There are layers of complexity and uncertainty,” she warned.
Ms Scotchbrook reminded SMSF professionals that a client is always going to be a retail client unless they meet one of the qualification in one of the prescribed subsections of 761G(1) of the Corporations Act.
“Unless they meet one of those sub regulations, they’re always going to be a retail client. [However], the other thing to think about too is that if you’ve ever provided a financial service or a client’s acquired a product as a retail client, that will forever be as a retail client,” she stated.
Certain aspects of SMSF advice, she said, will always be classed as retail advice.
“If we’re acquiring a superannuation product, that’s always going to be retail advice. Within the accumulation phase, where we are talking about contributions and rollovers we’re talking about acquiring an interest in a superannuation product. When we’re talking about benefit payments, we’re looking at pension products so straight away we’ve got a superannuation product,” she explained.
“Inherently, when we’re talking about transfer balance caps, we’re talking about the structuring of the financial product because that transfer balance cap can impact what we do in terms of the establishment of our pensions. [In terms of] estate planning, reversionary pensions will of course have a direct nexus with the pension establishment because its part of the terms and conditions of the pension.”
Ms Scotchbrook said even services such as risk profiling and insurance needs analysis can fall into the retail client scenario.
Subsection 761G(6)(a) makes it clear that a financial product provided to a person that’s a superannuation product, is a product provided to a person as a retail client.
“This is the catch-all because it’s saying, well, anything I’ve got involving a superannuation product, it’s going to be a retail client,” she noted.
“[However], if we then look a subsection 761G(6)(c), we can see that if we’ve got a trustee of a superannuation fund that has net assets of at $10 million and it relates to a superannuation product, then this will not constitute advice to a retail client. So this moves it out of a retail client space and into a wholesale client space.”
The way in which the definitions apply in the SMSF context is still very unclear, said Ms Scotchbrook.
“We don’t have clear definition around what relates to a superannuation product. There’s also divergent legal opinions out there as to how this all fits together,” she warned.
“To really complicate matters, we don’t have clear guidance from ASIC either.”
Their original guidance, QFS 150, which has since been withdrawn, stated that an SMSF had to meet the $10 million net asset test, she noted.
ASIC then issued a media release in 2014 with a revised position.
“In this media release [from 2014], they actually said that they would not take any compliance action if an SMSF trustee had been treated as being a sophisticated investor under the $2.5 million asset test as long as that advice or service was on how to invest the SMSF fund’s assets,” she explained.
Despite this, Ms Scotchbrook said there is still a lot of legal uncertainty and ambiguity which inherently increases risk for both advisers and accountants.
“The nub of the issue is whether this $10 million test is intended to apply to the SMSF acquiring investments or whether it’s intended to apply purely to superannuation products,” she explained.
While the release provides some clarity, this is not binding guidance and the issue is not resolved at law, she said.
“The media release goes on to say that while ASIC won’t take compliance action, it won’t stop someone suing you if they feel that they’ve been incorrectly classified as being a wholesale sophisticated investor,” she warned.
Ms Scotchbrook said different lawyers will give different opinions on how some of the provisions around wholesale and sophisticated investors actually apply.
“The risk for both advisers and accountants is the fact that the law is really uncertain for SMSFs,” she said.
As if having money makes anyone sophisticated 🙄
This whole approach is a scheme by the FSC to lay off the risk supported by 3 accounting organisations who have a membership marketing benefit because they are named as the only ones who can provide a certification.
Institutionalised corruption supported by convoluted and illogical legal and regulatory stipulations. Who would have thought?
This is a really difficult area and not necessarily well understood. The Corps Act states that “superannuation product advice” is retail however, the client may be wholesale in the case of a SMSF that has an Accountant’s Certificate. With the only carve out being for SMSFs with $10m+ net assets.
No wonder the sector struggles as you end up with a “hybrid client”. Wholesale for investment advice but retail for member advice. Same individuals but different disclosure requirements.
The law as written seems to ignore the fact that a SMSF trustee (controller) is one and the same as the membership so it is silly that the trustee can be treated as wholesale for investment advice – where the “risks” are probably at their highest – but need to be treated as retail when advice is to make a contribution or draw the minimum annual pension.
The situation is even more silly where you have a person invested in a super wrap product as they want to have bespoke investment advice but not fund administration responsibility. These folks, regardless of the size of their member balance, are to be treated as retail as the RSE trustee is separate and therefore all advice is member advice.
It is well and truly time for the definition of the wholesale client to be based on qualitative as well as quantitative assessment of individuals. The Accountant can sign off on the assets or income test qualification and the financial adviser undertakes a qualitative assessment of the person’s ability to understand and interpret complex financial concepts. Super product advice should then have an exception for a person who is able to qualify under the expanded wholesale test. Rather than responding using a nanny state approach of reducing eligibility to be treated as wholesale, lets make it a more sophisticated test.
So would the solution not be for this whole thing to be fixed once and for all? As an accountant I feel that I am constantly being harassed by fin advisors who seem to want to bypass the advice process using the sales process on clients to push this as a must do, and drop my PI insurance into the mix while they are at it.
This needs to be fixed