Retail v Wholesale investors in the provision of Financial Services

What are the major differences between retail and wholesale investors?

• Retail investors must be provided with a Financial Services Guide (FSG), Statement of Advice (SOA) and where appropriate, a regulated offer document such as a Product Disclosure Statement (PDS)
• Retail investors have access to external dispute resolution schemes, while wholesale investors generally do not
• Retail investors are afforded all the consumer protections contained in the Future of Financial Advice (FOFA) reforms
• Wholesale investors can access a wider and more complex range of investments and products, which may have an enhanced risk profile

What is the rationale for the distinction?

Wholesale investors are considered to be better informed and more financially astute than retail investors, and to have relevant experience in investing. Accordingly, it is argued wholesale investors do not require all the consumer protections that apply to retail investors.

Does this mean wholesale investors are not afforded any protection?

Although wholesale investors do not have the same protections as a retail investor under the Corporations Act 2001 (Cth) (Act), general law duties still apply so that all investors (including wholesale investors) are owed a fiduciary duty by the Australian financial services licensee who is giving advice or providing a product or service.

What is a retail investor?

The basic proposition in the Act is that all investors (or potential investors) are retail, unless an exemption applies. Therefore, a “retail” investor includes anyone who does not come within the definition of a “wholesale” investor for the purposes of providing a financial product or financial service under section 761G(5), (6), (6A) or (7) or section 761GA of the Act.

What are the exemptions to being classified as a retail investor?

There are several ways in which an investor can be exempt from being classified as a retail investor. A general summary is set out below.

1. Price/value test

A person or entity invests where the entry price is $500,000 or more.

2. Net assets/income test

A person or entity has obtained an accountant’s certificate from a qualified accountant stating that the client:

• has net assets of at least $2.5 million, or
• has a gross income for each of the last two financial years of at least $250,000.

Once a certificate has been obtained, it is valid for a period of two years.

3. Professional investor test

Section 9 and 761G(7)(d) of the Act defines a professional investor, which includes (amongst other things):

• financial services licensees
• bodies regulated by APRA
• superannuation funds, and
• a person or entity who controls gross assets of at least $10 million (including any amount held by an associate or under a trust that the person manages).

4. Small scale offering

The small scale offering exception (known as the “The 20/12 rule”) is contained in section 708(1) of the Act.  It provides that a regulated disclosure document is not required if a person makes a personal offer of securities that results in securities being issued or transferred to 20 or fewer persons with no more than $2 million being raised in any rolling 12 month period.

What about self-managed super funds (SMSFs)?

Section 761G(6)(b) of the Act provides that if a financial service (other than the provision of a financial product), provided to a person who is the trustee of a superannuation fund that has net assets of less than $10 million, relates to a superannuation product, then the service is provided to the person as a retail client.

Previously, ASIC had interpreted this to mean superannuation fund trustees will always be retail clients (unless they are trustees of a fund which has at least $10 million net assets), because financial services provided to them will always “relate to” a “superannuation product”. Accordingly, in ASIC’s former view, the general wholesale client tests contained in section 761G(7) did not apply

However, ASIC has now clarified that a SMSF can be classified as wholesale if the trustee of an existing superannuation fund meets the general investor general test (e.g. if the trustee has net assets of at least $2.5 million, or income of $250,000 a year for the past two financial years, or by making an investment worth a minimum $500,000).

How can we help?

If an investor is unsure about whether they are a retail or wholesale investor, we strongly recommend they confirm this with their financial adviser, accountant or other professional advisor before making a decision to invest in a financial product.

One Investment Group is Australia’s largest provider of outsourced trustee and administration services to investment managers and the only provider able to provide a holistic solution to offshore fund managers or a single service. We are responsible for numerous wholesale managed investment schemes and retail managed investment schemes. Should you be considering establishing an investment vehicle for Australian assets or outsourcing or comparing service providers for some of your current roles, please do not hesitate to contact us.