ASIC's revised position on wholesale investor test for SMSFs

August 2014

ASIC has revised its interpretation of how the wholesale investor test applies to self-managed superannuation
funds (SMSFs). This change of position is welcome as ASIC’s previous stance was considered by various
observers (including HDY) to be an incorrect interpretation of the law. However, complexity remains around how the test applies to SMSFs in different contexts, given that SMSFs can be structured with different trustee and control arrangements.

The law

The wholesale test was included in the Corporations Act to draw an important distinction between retail and wholesale clients. Generally, the consumer protection provisions under the Act (including in respect of disclosure and Australian financial services licensing obligations) will apply only to retail clients. The policy basis for this was that wholesale clients do not need the same level of protection, as they are better informed and better able to assess the risks involved in financial transactions.

The wholesale test in the Corporations Act applies in different ways to different types of financial products. In the context of a superannuation fund, if a financial service (other than the provision of a financial product) provided to a person relates to a superannuation product, the service is taken to be provided to the person as a retail client unless the person is a trustee of a superannuation fund that has net assets of at least $10 million. This test is formulated under specific rules applying to superannuation funds and RSA products.

However, a general wholesale client test applies if the service does not relate to a superannuation product. The criteria in that general test include that a person will be a wholesale client if they acquire products with a value of at least $500,000 or if they have $2.5 million in net assets, or gross income for each of the last two financial years of at least $250,000 per annum.

In light of the differences in the thresholds and criteria between the superannuation and general wholesale client tests, exactly when a financial service relates to a superannuation product is a critical issue for service providers. It has been a particular area of complexity when applied to SMSF trustees.

ASIC’s changed approach to SMSFs

ASIC’s previous approach to SMSFs was captured under QFS 150 When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client? (QFS 150). In QFS 150, ASIC stated that a financial service would generally relate to a superannuation product in a situation where financial services were provided to the trustee of an SMSF. This position effectively introduced a presumption that regardless of the scenario and the nature of the service being provided, if that service were being delivered to an SMSF trustee it would be deemed to relate to a superannuation product and the superannuation test would therefore apply (together with its $10 million threshold).

However, the position under QFS 150 failed to recognise that there may be a range of scenarios involving the provision of services to SMSFs where the service may not relate to a superannuation product e.g. the issue of units in a managed investment scheme to the SMSF trustee. The QFS was also inconsistent with the technical operation of the relevant provisions of the Corporations Act.

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon has extensive experience in corporate and financial services law, specialising in complex transactions, funds management and investment distribution. Jon also advises on regulatory issues relating to the use of technology in financial services.

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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