SMSF trustees and members will continue to be viewed as retail clients unless their fund has $10 million or more in assets, and income or assets outside will not change that definition, the Australian Financial Complaints Authority (AFCA) has stated.
AFCA investments and advice lead ombudsman Shail Singh and investments and advice senior ombudsman Patrick Hartney reiterated the body’s position on the wholesale investor definition in a joint post on LinkedIn after noting it was an ongoing topic of discussion in the financial advice sector.
“The bottom line is that, under the law, if an adviser provides advice to a trustee in relation to an SMSF, it must be treated as a retail client unless the SMSF has $10 million or more in assets,” Singh and Hartney said.
They pointed out section 761G(6) of the Corporations Act states that when a financial service relates to a superannuation product, the fund must hold $10 million in assets to be treated as a wholesale investor.
Additionally, they noted section 761G(7), which sets out an assets, income or investment threshold wholesale test, does not apply if the financial service relates to a superannuation product, such as an SMSF.
“This means SMSFs 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,” they said.
“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.
“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.
“AFCA’s primary concern must be the legal classification of the SMSF as set out in the law to determine how we consider a complaint.”
They added this approach did not mean AFCA ignored the level of sophistication of an investor and it was considered in determining an appropriate level of compensation when a complaint was upheld.
This was carried out in a case heard by AFCA in June 2024, where it first addressed the issue of the wholesale investor definition, and decided while the use of the wholesale classification was incorrect, the complainant’s level of sophistication reduced the amount of compensation they received, they noted.
