Alex Sidoti, senior ombudsman for AFCA, told ifa’s sister brand SMSF Adviser that applying the general wholesale test could pose risks for advisers due to unresolved legal uncertainties within AFCA.
“Everyone needs to be aware that the risk is there until such time that it is resolved,” Sidoti said.
Sidoti explained a recent complaint to AFCA highlighted the issue, and disclosed there are upcoming determinations that are also likely to address “the grey area” between wholesale and retail clients.
The case in question involved a complaint to AFCA from the trustee of a corporate SMSF, who engaged a financial firm to provide advice and broking services. The trustee argued that the fund receiving the advice was a retail investor as it had less than $10 million in assets and was therefore entitled to the protections of the best interest duty.
On the other hand, the financial firm argued that the SMSF qualified as a wholesale client and that they only offered general advice. They contended that the trustee bore full responsibility for all investment decisions.
The firm was provided wholesale certificates from the trustee’s accountant stating the trustee had more than $2.5 million in assets or had otherwise met the income test of earning $250,000 for two consecutive years. This is regulated by section 761(G) s7 of the Corporations Act.
The trustee contested the financial firm’s reliance on wholesale certificates, arguing that since the advice pertained to the investment strategy of a superannuation fund, the applicable test should have been under section 761G(6) of the Corporations Act, requiring the SMSF to hold $10 million in assets.
“The general wholesale test in chapter seven of the Corporations Act talks about the wholesale test that applies when a financial service does not relate to a superannuation product,” Sidoti said.
“If the advice does relate to a super product then the test to apply is different. It requires $10 million in assets for that client to be treated as a wholesale client.”
Sidoti said ultimately AFCA found that only general advice had been provided, therefore it was immaterial to determine if the SMSF was wholesale or retail.
However, she said this has been an area of ambiguity for some time, especially following guidance QFS150 published by ASIC several years ago that indicated the $10 million test is the most appropriate one to apply in this scenario.
“ASIC also stated it was not going to enforce this but flagged that advisers could face private action,” Sidoti said.
“The industry needs to be careful around this issue. AFCA has a couple of matters coming through that will go through to determination and hopefully, it will have to resolve the uncertainty and make a call, but ultimately it is up to licensees to make that call to see what their risk settings are.”
I believe that AFCA has made a mistake in law. Section 761G(6) clealy limits the application to where “the [b]financial product provided to a person is a superannuation product or an RSA[/b]”. In this case, the client was the trustee of the SMSF. The [u]trustee[/u] was not being provided with either a superannuation product or an RSA. I expect there to be an appeal. In the interim, the law has not changed although AFCA members will need to proceed with caution.
If an adviser is only going to provide general financial advice then get the client to sign a General Advice letter acknowledging such.
There’s an easy way to fix this. Make all SMSFs wholesale products by definition, and require all members of an SMSF to meet the wholesale investor definition.
This would not only resolve the ambiguity, but would also fix the much larger problem of unsophisticated investors being conned/pushed into SMSFs which are unnecesssary and inappropriate for them.
This seems like overkill and would massively support industry funds at the cost of Australians who want to make active decisions with their retirement savings, so yep would be supported by Labor for sure!
There are plenty of ways to make active decisions with retirement savings, without using SMSFs.
Besides which most SMSF members are not making active decisions at all. Many have outsourced the decision making to accountants or advisers, who are running SMSFs as a high cost inhouse product. There are also many members such as the spouse, siblings, parents, and children of a dominant individual, who were press ganged into joining the SMSF. These other family members have zero involvement in decisions, and absolutely no understanding of their legal responsibilities as trustees.
Make a clear determination on the rule then noone is confused or unprotected. This is the regulators job not the advisers.
Caution investors not advisers. And make the rule clear for advisers problem fixed consumers protected. Twits
The industry should be careful the regulators should clarify with a specific clear black and white metric. Talk about the law is an ass well the law previously was if the trustees met wholesale and all members did individually then 10m didn’t apply Advisers shouldn’t bear the risk or be playing in a grey area for something defined by law and regulations. Make it black and white and consistent
Wow imagine Financial Advisers operating in a complete and utter HOT MESS of conflicting Over Regulation.
Imagine Canberra Pollies and Bureaucrats creating a GORDIAN KNOT of Costly Red Tape Regulation that no one can understand.
CAN CANBERRA STUFF THIS WHOLE INDUSTRY UP ANYMORE THAN THEY HAVE ???????
Is Canberra this stupid ?
Or
Is Canberra Intentionally KILLING REAL ADVISERS to promote Industry Super everything ?