Wholesale vs Retail Clients Explained
A person is either a wholesale client or a retail client in relation to a particular financial product or service. However, the distinction is complicated and a person can be both type of client at the same time in relation to different products and services.
What is a Retail Client?
Retail clients are considered by law as less financially literate than their wholesale counterparts. The law requires financial services providers to meet a wide range of prescriptive disclosure, dispute resolution, training, product design and conduct requirements when dealing with retail clients that do not apply to wholesale clients.
What is a Wholesale Client?
According to sections 708 and 761G of the Corporations Act 2001, there are 5 eligibility tests to determine whether or not a client is eligible to be considered wholesale.
Eligibility to be a Wholesale Client is determined by meeting one of the 5 eligibility tests:
- Product value – of over $500,000
- Individual wealth – measured in terms of gross income or net assets as certified by an accountant’s certificate
- Professional investors – mostly institutional investors and investment managers
- Large businesses – as measured by number of employees
- Sophisticated investor – as determined by an AFSL holder based on the client’s investment experience.
Again, the criteria applying to each test is complicated and not all tests can be used in all situations. Applying the tests to entities such as trusts (and particularly SMSFs) can also raise difficulties.
Simply meeting an eligibility test might also not be sufficient as regulators are increasingly taking the view that classifying clients with low levels of financial literacy as wholesale might result in a breach of other regulatory obligations (such as those relating to acting fairly).
What is a Sophisticated Investor and what is the Sophisticated Investor Test?
Sophisticated investors are persons that an AFS licensee has determined to be experienced in using financial services.
The Sophisticated Investor test consists of 5 elements which can be summarised as follows:
- the product is not a general insurance product, a 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 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 matters.
What are the Individual Wealth Tests?
Individual Wealth tests require a person to have:
- net assets of at least $2.5 million; or
- gross income for each of the last 2 financial years of at least $250,000, as certified by an accountant. The certificate lasts for 2 years before requiring renewal.
In determining the net assets or gross income of a person, the net assets or gross income of a company, or trust controlled by that person, can be included. Similarly, if a person is eligible to be a wholesale client, then a company or trust controlled by that person is also a wholesale client.
How we can help
Our team of experts have extensive experience in this area:
- provide legal advice in relation to the application of the eligibility tests
- provide legal advice in relation to the effect of wholesale client status on your conduct and disclosure obligations
- provide legal advice in relation to product design for wholesale products
- prepare documentation for assessing wholesale client eligibility (such as application forms and sophisticated investor letters)
- assist with AFSL applications for wholesale only businesses
Want to learn more about Wholesale vs Retail clients?
Reading material
- Wholesale Client Eligibility – Sophisticated Investor and Individual Wealth Tests
- Are changes coming to the wholesale client eligibility rules?
- RG 132: Compliance systems for Wholesale Managed Funds
- Retail vs Wholesale Clients – Regulatory Concerns & Responses
- The Royal Commission – a missed opportunity for Wholesale Clients?
- Is the end coming for the Sophisticated Investor?
- Certified Wholesale – SMSFs and Accountant’s Certificates
- What the Storm Financial case told us about wholesale client eligibility
