ASIC have today released a no action position statement which effectively delays commencement until 31 January 2020 (inclusive) of the exclusion from CFDs issuers using the ‘price and value test’ when classifying customers as wholesale clients. ASIC has decided to grant this no-action position to provide licensees with a period of time to make any necessary changes to their processes, procedures and systems to reflect the amendments to corporations regulation 7.1.22AA(1) made last week.
A previous version of this article advised that ASIC released an instrument preventing the use from 18 December 2019. However we understand that due to the late notice provided of the new requirements, ASIC have considered feedback from industry participants and modified their position to provide further relief around the start date.
This clarifies a previous source of confusion for many brokers and a ‘loophole’ that allowed more aggressive brokers to set their clients up to avoid client money restrictions and proposed leverage caps by no longer being a ‘retail client’.
The ‘price and value test’ provided by s 761G(7)(a) of the Corporations Act 2001 (Cth) allows licensees to classify clients as wholesale where the price or value of a financial product provided to a person exceeds AU$500,000.
The rationale behind the amendment appears to be that the notional value of AU$500,000 under a CFD could be achieved with a modest initial margin.
Clients who are classified as wholesale are excluded from certain regulations under the Corporations Act including issuing of disclosure documents including Product Disclosure Statement and Financial Services Guide; ability to lodge complaints with AFCA; ensuring staff dealing with clients hold appropriate RG 146 courses and the treatment of client money.
What to do Next
All licensees issuing CFDs should immediately review their:
- Onboarding process to prevent any further clients being classified as wholesale through any form of the ‘price and value test’ that they have previously used;
- existing wholesale clients to identify any clients qualified using the ‘price and value test’.
All clients who have been classified under the ‘price and value’ test should be reviewed to determine if they meet any of the other wholesale client requirements (briefly outlined below). Where it is no longer appropriate that the client be classified as a wholesale investor, the licensee should:
- inform the client that they will be reclassified as a ‘retail client’;
- issuing the client with compliant disclosure documentation;
- advise the client of their new customer protections; and
- conduct a reconciliation of client money to ensure that client money which was previously classified as wholesale adheres to the rules for the treatment of retail client money.
Other Wholesale Investor Tests Unaffected
ASIC’s amendments do not alter other thresholds which may allow a client to be classified as a wholesale client including:
- The large business test – that the business has more than 20 employees (or 100 employees in the case of a manufacturing business);
- The net assets and gross income test – the person has net assets of at least $2.5 million or gross income for the last two financial years of at least $250,000, as certified by an accountant. Note, the certificate lasts for two years before requiring renewal.
- The professional investor test – includes a number of persons including AFS Licence holders; bodies regulated by APRA; a trustee of a super product with more than $10 million in gross assets; a listed entity and its related body corporates; an exempt public authority and a person who carries on an investment business that is offered to the public; and
- The Sophisticated investor test (note anyone qualified under this test cannot have their money excluded from client money segregation protections) – this category are persons who the AFSL holder has determined to be experienced in using financial services. In order to qualify for the test, the following conditions must be met:
- The product is not a general insurance product, superannuation product or an RSA product;
- The product or financial service is not used in connection with a business;
- The licensee is satisfied on reasonable grounds that the client has previous experience in using financial services and investing in financial services and investing in financial products that permits the client to assess a range of specified factors;
- The licensee gives to the client a written statement of its reasons for being so satisfied; and
- The client signs a written acknowledgement in relation to certain matter.
- ASIC Regulatory Guide 108: No-action letters (RG108)
- Types of Clients – Retail v Wholesale
- The Treasury Laws Amendment (Miscellaneous Amendments) Regulations 2019
- Corporations Regulations 2001
Please contact us for further information on the changes.
Sophie is the director of both Sophie Grace Legal Pty Ltd and Sophie Grace Pty Ltd. Sophie has worked with some of Australia’s largest financial services organisations in compliance, legal and operational roles. She has also worked with small businesses to provide tailored solutions with a strong understanding of business practicalities as well as obligations to regulators.