Investments, Regulation, SMSF

Investor test needs review

SMSF investor test

There is a lack of clarity surrounding the classification of SMSF trustees as wholesale or retail clients when they choose to seek financial advice, prompting calls for further evaluation.

The Australian Law Reform Commission (ALRC) has acknowledged the confusion surrounding the application of the wholesale or retail investor test for SMSF trustees seeking financial advice and highlighted the need for further evaluation.

According to its latest background paper, “Superannuation and the Legislative Framework for Financial Services”, the ALRC identified a lack of clarity in determining whether an SMSF trustee should be classified as a retail or wholesale client due to the absence of clear guidance in existing legislation.

Currently, the Corporations Act states financial services connected to superannuation or retirement savings accounts are generally offered to regular individuals as retail clients.

“Under these provisions, it is uncertain whether a financial service ‘relates to’ a superannuation product. In 2004, ASIC issued QFS 150, which stated that a financial service would typically ‘relate to’ a superannuation product if a financial service was provided to a SMSF trustee,” the background paper noted.

“Therefore, generally speaking, an SMSF trustee was classified as a retail client, except where the $10 million asset test is satisfied.”

SuperConcepts SMSF technical and strategic solutions expert Philip La Greca added the review of the managed investment schemes regulatory framework, announced in March, was examining the definition of wholesale and sophisticated investors to offer clarity on the issue.

“Probably the biggest impact that [the review] will have on SMSFs is that one of the things they will be looking at is the existing definitions of retail, wholesale and sophisticated investor classes,” La Greca said during a recent online briefing.

“SMSFs sometimes want to be classified as sophisticated investors because there are certain products that they want to access and they can only access them if they’re sophisticated investors.

“To be a sophisticated investor, you either have to have $2.5 million worth of assets or taxable income of $250,000 based on the last two tax returns.

“Those thresholds are the same threshold that have been here since the Financial Services Reform Act was written in 2000. They are 23 years old.

“So the potential of these changes could limit, in the future, the access SMSFs may have to certain investment products and may impact products with an older definition such as whether that product still has to provide retail investor protection rights.”

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