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 compliance obligations and processes differ significantly between these two types of clients.
Who is considered a Retail Client?
Any client who does not fall into the category of a sophisticated/professional investor or does not meet the wholesale client definitions in the Corporations Act are considered retail clients.
The law affords greater protections to retail clients and financial service providers need to be aware of the compliance obligations this places on them.
Who is considered a Wholesale Client?
Essentially all clients are retail clients unless they can satisfy the requirements of being a wholesale client. The Corporations Act includes tests which clients must meet in order to be considered wholesale. These tests include:
- The Sophisticated Investor Test;
- The Professional Investor Test;
- The Experienced Investor Test;
- Price or Value Test; and
- Size of Business Test.
Sophisticated Investors are individuals with net assets of at least $2.5 million or a gross income for the last two financial years of at least $250,000 as certified by an accountant.
If an individual is found to be a sophisticated investor, any company or trust controlled by the individual can also be considered a wholesale client.
Professional Investors are required to meet one or more of the characteristics defined in the Corporations Act, including being characterised as:
- An AFSL holder;
- A body regulated by APRA, other than a trustee of a superannuation product;
- A body registered under the Financial Corporations Act 1974;
- A trustee of a superannuation product with more than $10 million in assets;
- A person having or controlling more than $10 million in gross assets (including moneys held by an associate or on trust);
- A listed entity and its related body corporates;
- An exempt public authority;
- A person who carries on an investment business that is offered to the public; or
- A foreign entity that would meet one of these requirements had it been established in Australia.
Experienced investors are clients with previous experience in utilising financial services and investing in financial products. The service must be provided in connection with a business and you’ll need to ensure you obtain proof or confirmation of your client’s experience before providing any services.
Price or Value
The price or value test is one of the simplest. It essentially 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.
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 small 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. In addition, you will need to consider who can access your services (for instance, via a website) and how you might go about restricting access to wholesale clients only.
For further information on the distinction between retail and wholesale clients and how this may affect your financial services business, please contact us.