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 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.