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:
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:
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.