With the enactment of the Future of Financial Advice legislation, the distinction between wholesale and retail clients now has new significance.
In relation to SMSFs, the main effects of the distinction between wholesale and retail clients are that only a retail client is required to be given a financial services guide, a statement of advice or a product disclosure statement. Also, the FOFA obligations concerning best interests obligations, the charging of ongoing fees and the prohibitions concerning conflicted remuneration apply only in relation to retail clients.
The wholesale/retail rules
A client is required to be treated as a retail client unless the legislation allows otherwise. However, two overriding rules must be kept in mind.
One, a superannuation product is always provided to a client as a retail client regardless of their eligibility to be a wholesale client.
Two, if any other type of financial service is provided to a person which "relates to a superannuation product", then the client must usually be treated as a retail client regardless of their eligibility to be a wholesale client.
What is clear from this is that advice to a person concerning matters including setting up an SMSF must be made to the client as a retail client since they involve the provision of an interest in a superannuation product or the provision of a financial service which clearly relates to such a superannuation product.
However, what if the advice is given to the trustee(s) of an existing SMSF? Do the overriding rules mean the trustee(s) of an SMSF can never be a wholesale client as the advice "relates to a superannuation product"? In this regard opinions differ.
The ASIC view
In 2004, ASIC issued QFS 150, stating that when financial services are provided to the trustee of a superannuation fund they are provided to a retail client unless the fund has net assets of over $10 million at the time the service is provided. Few SMSFs have over $10 million in net assets, meaning trustee(s) of an SMSF cannot be treated as a wholesale client.
There has been no material change to the law concerning wholesale clients since 2004 and there have been several indications that ASIC still holds this view.
An alternative view
An alternative view is that advising the trustee(s) of a superannuation fund in relation to a non-superannuation financial product or a product that is not a financial product does not "relate to a superannuation product". Rather, it relates to that particular product being advised on.
The result of this view is that the trustee(s) of the SMSF can qualify as a wholesale client in relation to non-superannuation product advice.
At the time of the announcement of the FOFA reforms, the government indicated it would consider the appropriateness of the wholesale/retail distinction, releasing an options paper on the subject in January 2011.
The options paper questioned whether the "confusion" concerning the expression "in relation to a superannuation product" needs clarification. A number of submissions made in response to the paper were in favour of clarifying this point and disagreed with the ASIC interpretation in QFS 150.
The alternative view discussed above does not mean that the trustee(s) of the SMSF are wholesale clients. It means they can be treated as wholesale clients if they meet one of five eligibility tests. For example, the product value eligibility test, where the product being invested in or advised on has a value exceeding $500,000.
Whether the trustee(s) of an SMSF meet one of these eligibility tests will need to be determined having regard to the circumstances of each particular fund.
Can the trustee(s) of an SMSF ever be treated as a wholesale client? If you take the ASIC view the answer is a clear no.
If you take the alternative view then the answer is a qualified yes. However, the adviser must still ensure that the trustee(s) meet one of the eligibility tests – which will by no means be a certainty in any particular case.
David Court, partner at Holley Nethercote Commercial and Financial Services Lawyers