ASIC withdraws controversial position re SMSF and the wholesale investor test

Self-managed super funds and the 'wholesale investor test' -ASIC withdraws controversial position


On 8 August 2014, the Australian Securities and Investments Commission (ASIC) withdrew its controversial interpretation of the wholesale client tests as they apply to trustees of self-managed superannuation funds (SMSFs).
Following a review of its response to a "frequently asked question", namely QFS 150 'When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client? (QFS 150)', first issued in 2004, ASIC confirmed it will not take action against Australian financial services (AFS) licensees who treat trustees of SMSFs as wholesale clients where they meet the general wholesale client tests contained in the Corporations Act 2001 (Act), in relation to the provision of financial services which do not relate to superannuation products. This means AFS licensees can provide investment advice and issue financial products (but excluding superannuation products) to trustees of SMSFs who meet the wholesale client test contained in section 761G(7), without the risk of prosecution by ASIC.
The Property Funds Association and McMahon Clarke warmly welcome ASIC's reversal—a move we have collectively lobbied ASIC to make since 2008.

The source of the confusion

Chapter 7 of the Act provides tests for determining whether a person is a retail client or a wholesale client, which differ depending on the nature of the financial product or financial service being provided. Where the financial product is not, or the financial service does not relate to, a superannuation product, the general wholesale client tests apply to determine whether a person is or is not a wholesale client, such as the “product value test” and the “net income/assets test”.
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.
The issue in the application of the wholesale client tests hinges on whether the provision of a financial service, or the issuing of a financial product, to a trustee of a superannuation fund necessarily “relates to” a “superannuation product”, by virtue of the trustee administering a superannuation fund.
ASIC’s interpretation
In QFS 150, ASIC interpreted section 761G(6) of the Act 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 view, the general wholesale client tests contained in section 761G(7) did not apply. 
Our view
In our view the reference to ‘superannuation products’ in sections 761G(6)(b) and 761G(7) are to be interpreted as a reference to situations where the financial service being provided actually relates to the acquisition or disposal of (or the financial product is) an interest in a superannuation fund, and does not refer to the acquisition of, or advice in relation to, investments made by the trustee of a superannuation fund. Accordingly, the issue of a financial product to the trustee of a superannuation fund is not the provision of a financial service which "relates to" an interest in a “superannuation product” simply because the acquirer of the product is the trustee of a superannuation fund. Therefore, the trustee receiving the product or service may be treated as a wholesale client if the trustee satisfies one of the general wholesale client tests.
What does this mean for wholesale fund operators?
Trustees of wholesale managed investment schemes can rest easy knowing they can accept investment from, and provide investment advice to, trustees of superannuation funds (including SMSFs) where they meet the general wholesale client tests without fear of prosecution by ASIC. Up until now, ASIC’s controversial opinion has resulted in some wholesale fund managers erring on the side of caution and needlessly registering funds to avoid the potential for regulatory action, resulting in increased costs and regulation for these operators. This change in interpretation provides some much needed certainty to fund managers and will allow operators to more confidently service Australia’s growing SMSF industry.
Moving forward
Despite this welcomed removal of uncertainty, ASIC has stressed the importance of fund managers adhering to the law in the provision of financial services and issuing of products. ASIC has confirmed it will take regulatory action where financial service providers fail to properly apply the general wholesale client tests. Although this is nothing new, it is an important reminder of the importance for fund managers to correctly understand and apply the law as it relates to their financial services business.

The PFA acknowledges and thanks McMahon Clarke for their efforts in both lobbying for our industry and association, on this issue, and for writing this article.










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