Exclusion of Price and Value Test for CFD Issuers in the Wholesale Investor Test
What is the Exclusion?
The Corporations Act 2001 (Cth) (“Corporations Act”) and the Corporations Regulations 2001 (“Corporations Regulations”) include a range of different options for how to classify a client as wholesale. Only one of the tests is required to be met per client. One of the most common tests used is the ‘Price or Value Test’, which allows licensees to classify clients as wholesale where the price or value of the financial product provided to a consumer exceeds AUD$500,000.
However, CFD issuers are excluded from using the ‘price and value test’ when classifying customers as wholesale clients under the Corporations Regulation 7.1.22AA(1). The rationale behind the rule is that the notional value of AUD$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 the issuing of disclosure documents including Product Disclosure Statements and Financial Services Guides; ability to lodge complaints with AFCA; ensuring that staff dealing with clients hold appropriate RG 146 course qualifications and the treatment of client money.
What does it mean for CFD issuers?
All licensees issuing CFDs should review their:
- onboarding process to prevent any further clients being classified as wholesale through any form of the ‘price and value test’; and
- existing wholesale clients to identify any clients qualified using the ‘price and value test’.
All clients who have previously been classified under the ‘price and value’ test should be reviewed to determine if they meet any of the other wholesale client requirements. 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’;
- issue 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.