When providing financial services, the Corporations Act 2001 (“Corporations Act”) distinguishes between two different types of clients: Retail and Wholesale.

Why is the Distinction Important?

Distinguishing correctly between retail and wholesale clients is important for financial service providers as the licensing requirements and compliance obligations and processes differ significantly between these two types of clients.

Who is considered a Retail Client?

Any client who does not meet the wholesale client definitions in the Corporations Act and Corporations Regulations 2001 is considered to be a retail client.

The law provides greater protections to retail clients, so financial service providers need to be aware of the additional obligations which apply when dealing with retail clients.

Who is considered a Wholesale Client?

The Corporations Act and 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. The most common tests used are:

1. The Sophisticated Investor Test;
2. The Professional Investor Test;
3. Price or Value Test;
4. Net Wealth or Income Test; and
5. Size of Business Test.

Sophisticated Investors

Clients may be classified as sophisticated investors where:

• the product or service is not being provided in connection with a business; and 
• the licensee is satisfied the client has previous experience in using financial services and investing in financial products.

When relying on this test, written statements must be provided, and specific acknowledgements received, from the clients.

General insurance, superannuation and RSA products as well as traditional trustee company, crowd-funding and superannuation services are excluded from utilising this test.

Please note that if you are a CFD issuer, you must handle the Client Money from Sophisticated Investors in accordance with the ASIC Client Money Reporting Rules 2017. Sophisticated Investors are considered to be retail clients for the purpose of defining Derivative Retail Client Money. For more information about OTC Derivative Client Money, please read this article.

Professional Investors

Professional Investors are required to meet one or more of the characteristics defined in the Corporations Act, including:

• holding an AFSL;
• bodies regulated by APRA, other than a trustee of a superannuation product;
• bodies registered under the Financial Sector (Collection of Data) ACT 2001;
• trustee of a superannuation product with more than $10 million
  in net assets;
• person having or controlling more than $10 million in gross assets (including moneys held by an associate or under a trust the person manages);
• listed entities and their related body corporate;
• exempt public authorities;
• persons who carry on an investment business that is offered to the public; or
• foreign entities that would meet one of these requirements if established or incorporated in Australia.

Price or Value

The price or value test involves ensuring that the price or value of the product being invested in or advised on exceeds $500,000. This test does not apply to risk-based products such as life insurance or if the value is sourced from a superannuation fund. 

Please note that if you are a CFD issuer, you’re excluded from utilising this test to classify clients as wholesale.

Net Wealth or Income

Individuals with:

• net assets of at least $2.5 million; or
• gross income of at least $250,000 for the last two financial years;

as certified by a qualified accountant, where the product or service is not provided in connection with a business, are deemed wholesale clients. The certificate collected from the qualified accountant must be given within the preceding two years.

Size of Business

The Size of Business test applies when the financial product or service is provided for use in connection with a business that is not categorised as a small business.

A business is considered a “small business” when it has less than 20 employees – or less than 100 employees if the business is or includes the manufacturing of goods.

 

If you’re planning on limiting your service to wholesale clients only, it’s extremely important that you ensure all clients who are onboarded are qualified as wholesale clients prior to providing any financial services. If you are providing services to both retail and wholesale clients, you should also be careful in your communication with wholesale clients to ensure that wholesale clients are not provided with retail disclosure documents as well as other retail information. Provision of retail information or documents to wholesale clients may lead to an inadvertent reclassification of clients to retail. Therefore, we suggest financial services providers review their marketing processes and documents, including email signatures as many financial services include links to their retail disclosure documents in their signature and consider who can access your services (for instance, via a website) and how you might go about restricting access to wholesale clients.

For further information on the distinction between retail and wholesale clients and how this may affect your financial services business, please contact us.