What’s next for wholesale clients?
A lesser-known recommendation of the Quality of Advice Review will impact how licensees classify their wholesale clients.
The reviewer, Michelle Levy, was tasked with considering whether consent arrangements for sophisticated investors and wholesale clients were working effectively for the purposes of financial advice and sought feedback from stakeholders on this point.
Ms Levy found that stakeholders had very little to say about the sophisticated investor test. This test focuses on the client’s experience in relation to financial products or financial services generally. Licensees have obligations to certify in writing their reasons for being satisfied that a sophisticated client has previous experience in investing in securities and other financial products. The certification is to show that the client can assess the merits, value; and associated risks of the product and both their own information needs and the adequacy of the information provided by the licensee.
The sophisticated investor test is subjective and not many firms rely solely on it for this reason.
Indeed, the Quality of Advice review surmised that, in the main, those who provide advice to wholesale clients do so on the basis of the assets and income threshold and accountant’s certification limb of the definition of wholesale client. This test for high net worth investors requires a client to provide a certificate from their accountant that they have either net assets of at least $2.5 million or a gross income for each of the past two financial years of at least $250,000.
Many stakeholders who provided feedback to the review stated that they considered that the assets and income thresholds for the wholesale client test were too low. The threshold amounts have not been reviewed (or even indexed) since they were first introduced in 2001 and Michelle Levy stated that there appears to be a need to consider whether they are appropriate.
The accounting industry associations also told the review that advisers frequently refer clients to their members for the purposes of certifying that they meet the assets and income threshold. They say they worry that in many cases the clients do not understand what protections they will lose as a result of the certification.
The Quality of Advice Review has recommended that the Corporations Act be amended to require both disclosure and consent for wholesale clients under the assets and income limb of the test, in the same way as it does for sophisticated investors.
In support of this recommendation, the reviewer stated that in her view, there is a very important difference between a client who is a wholesale client under the assets and income threshold and a client who is a sophisticated investor. While an accountant must certify the client has the assets or income to meet the threshold for the high net worth investor test, the certification turns on a simple question of fact and does not turn on any requirement for the client to understand the consequences of being treated as a wholesale client. A ‘sophisticated investor’ on the other hand must in the first instance be someone the licensee is satisfied on reasonable grounds is in fact ‘sophisticated’ and who must agree to be treated as a wholesale client and in so doing they must acknowledge what they are giving up. Ms Levy stated that this difference is ‘undesirable and unwarranted’.
The review recommends that the Corporations Act be amended to require a client who meets the assets and income threshold and who has an accountant’s certificate to provide a written consent to being treated as a wholesale client.
The written consent should contain an acknowledgment that is given before they are provided with a financial product or service that:
• the advice provider is not required to be a relevant provider and accordingly they will not have to comply with the professional standards;
• the advice provider will not have a duty to give good advice or to act in the best interests of the client under the Corporations Act;
• the advice provider is not required to give the client a product disclosure statement or financial services guide; and
• the client will not be entitled to complain about the advice under the AFS licensee’s internal dispute resolution procedures or to AFCA.
The review also recommended that the existing consent requirements for sophisticated investors be amended to require a written acknowledgement in the same terms.
The objectives of this reform are to ensure that high net worth investors and sophisticated investors are aware of and agree to the protections they lose by not being a retail client.
SIAA supports this recommendation. It reflects the practice of many of our member firms and is a sensible reform. As SIAA noted in its thought leadership paper Does the wholesale investor test need to change? many of our member firms have developed robust processes for onboarding wholesale clients that ensure they are aware of the consequences of no longer being categorised as retail, with clients required to sign and return an acknowledgement letter. Clients are advised as part of this process that they can ‘opt-in’ to retail if they decide they no longer want to be classified as wholesale.
Importantly, under these processes, an adviser cannot simply categorise a client as wholesale — the application must be put before compliance personnel and a control process is applied. The licensee adds the client as a wholesale investor and the adviser cannot interfere in that process. Any queries are referred to compliance.
The government has accepted recommendation 11 ‘in principle’ and it will be interesting to see if it is implemented quickly and in what form.
