AFCA seeks to clarify retail v wholesale classification for SMSF clients

Shail Singh said the classification of wholesale and retail investors has been a recurring topic for the Australian Financial Complaints Authority (AFCA) and has been addressed on numerous occasions, most recently in the regulator’s March member forum.

“There’s been some confusion about how self-managed super funds are classified in relation to complaints to AFCA. We tackled this topic at our most recent member forum, to help advisers understand when an SMSF can – or can’t – complain to AFCA,” Singh said.

“AFCA applies the law as it stands. This is spelled out in the Corporations Act, where section 761G(6) says that when a financial service relates to a superannuation product, the super fund must hold $10 million in assets to be treated as a wholesale investor.

“Further, Section 761G(7) – which sets out an assets, income or investment threshold wholesale test – specifically does not apply if the financial service relates to a superannuation product, such as an SMSF.”

Singh continued that this means self-managed super funds (SMSF) do not automatically meet the wholesale classification test based on the trustee’s income or asset levels outside of the fund. Instead, classification hinges on whether the fund itself surpasses the $10 million threshold.

“This means that even if trustees have extensive investment experience, the SMSF is still regarded as a retail investor if the fund’s asset base is below $10 million,” he said.

“ASIC indicated in August 2014 that, as a regulator, it would not be enforcing the wholesale classification requirement. But it noted that this position did not eliminate the legal risk for firms, with consumers still able to pursue ‘private action’, which includes complaints to AFCA.”

He added that AFCA’s primary concern must be the legal classification of the SMSF as set out in the law, to determine how it considers a complaint.

“That is not to say the level of sophistication of an investor is ignored in our process, should the complaint be accepted. AFCA does consider the complainant’s sophistication when weighing the appropriate level of compensation if a complaint is upheld,” he said.

He gave an example of a case that involved the complainant who was a corporate trustee of an SMSF and who was also the sole director and beneficiary of the SMSF.

The facts of the case stated that on 3 May 2021, the complainant as trustee of the SMSF entered a managed discretionary account (MDA) service with W Pty Ltd, a corporate trustee of financial firm.

The MDA service involved margin FX trading on behalf of the SMSF and was only available to wholesale clients.

To facilitate the margin FX trading under W Pty Ltd’s MDA service, a margin FX trading account with 1,000:1 leverage was opened with a financial firm in the corporate trustee’s name in their capacity as trustee of the SMSF. The SMSF deposited $615,000 with the financial firm on 14 May 2021 and margin FX trading commenced on 20 May 2021.

The financial firm accepted margin FX trading instructions from W Pty Ltd on the SMSF’s behalf under a limited power of attorney granted to W Pty Ltd.

W Pty Ltd’s margin FX trading on behalf of the SMSF was initially successful, but significant losses were suffered in September 2022 because of a sharp devaluation of GBP.

The complainant sought compensation for the SMSF’s losses, claiming, among other things, that the SMSF was not a wholesale client.

The financial firm said it correctly assessed the SMSF as a wholesale client relying on a qualified accountant’s certificate dated 18 February 2020 stating the complainant had net assets of at least $2.5 million. It also stated it also relied on the qualified accountant’s certificate to open the margin FX trading account with leverage that exceeded that permitted by ASIC’s product intervention order issued in October 2020 and effective from 29 March 2021.

Singh said in this case, the AFCA panel found that a wholesale classification was incorrect, but it still took into account the complainant’s level of sophistication, reducing the amount of compensation.

“We use three-member panels in some cases, with a panel made up of an ombudsman, someone with industry experience and someone with a consumer perspective,” he said

“The key takeaways from this case for financial advisers is that in making the determination between wholesale and retail investors, the asset threshold is the key factor and an SMSF must have assets exceeding $10 million to be considered non-retail.

“Additionally, ASIC’s position does not limit consumer action and SMSF trustees can still pursue complaints through AFCA, if the fund has less than $10 million in assets. Finally, sophistication matters in compensation, not classification and if a complaint is upheld, investor sophistication may reduce compensation but does not alter the retail classification.”

He added that by keeping these principles in mind, financial advisers can better navigate risks while maintaining trust and transparency with SMSF clients.