On 7 July 2017, ASIC issued a media release concerning action that it had taken over a particular example of perceived inappropriate use of accountant's certificates to treat investors as wholesale clients.
Although ASIC provided few details of what this "inappropriate use" involved, and there was no specific mention of Self-Managed Super Funds (SMSFs) being targeted, it is a timely reminder for financial advisers and accountants that they need to be aware of how an accountant's certificate can be used under the wholesale clients rules – and the difficulties that can arise with SMSF clients.
In Part I of this two-part blog series, we will address the following questions:
- What is an accountant's certificate?
- What is the distinction between wholesale and retail clients?
- When is it permissible to treat an SMSF client as wholesale?
What is an accountant's certificate?One of the means of classifying a client as a wholesale client, for the purposes of the financial services laws, is to obtain a certificate from an accountant to the effect that the client meets either the income or assets individual wealth tests. However, these tests are not straightforward and raise a number of issues when the client is an SMSF. (More on the individual wealth test later in the second part of the blog)
What is the distinction between wholesale and retail clients?The distinction between wholesale and retail clients has been a fundamental part of the financial services laws since the 2004 Financial Services Reform legislation. Under those laws, a person is either a wholesale client or a retail client in relation to a particular financial product or service. A client is required to be treated as a retail client unless the financial services legislation permits otherwise.
The distinction between wholesale and retail clients has a number of significant effects under the financial services laws. Many of the disclosure and conduct rules do not apply in relation to wholesale clients. Some products are also only open to investment by wholesale clients.
When is it permissible to treat an SMSF client as wholesale?An SMSF must have one of two trustee structures:
- Corporate trustee – each member must be a director of the trustee. A single member SMSF may have either one or two directors – the second director being either a relative or person who is not an employer of the member; or
- Individual trustees – for a multiple member SMSF, each member must be an individual trustee. For a single member SMSF, there must be 2 individual trustees – the second trustee being either a relative or person who is not an employer of the member.
- At law, the SMSF trust fund is itself not a legal entity, and
the status of the fund's trustee(s) as a wholesale client needs
to be looked at rather than the trust itself.
Where the SMSF has individual trustees, then the client is the joint individual trustees. It is crucial in this regard to keep in mind that individual trustees must be considered as a joint entity and not as the sum of their individual circumstances. For example, in the NSW case of Sky v Body [(1970) 92 WN (NSW) 934 per Street J]:
"Inherent in the basic system of trusts is the principle that trustees must act unanimously. They do not hold several offices – they hold a single, joint, inseparable office."
What are the wholesale client eligibility tests?The legislation creates 5 classes of eligibility to be a wholesale client. Only one of these classes, the individual wealth tests, requires certification by accountants... (to be continued).
Stay tuned for Part II of this blog series, where we continue to explain the wholesale client eligibility tests, as well as answer the remaining questions:
- What are the wholesale client eligibility tests?
- What is individual wealth?
- How are controlled entities included?
- Who can control an SMSF?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.