In considering managed financial schemes, you may have noticed a distinction between retail and wholesale clients. This distinction is important as a great deal of obligations and compliance requirements for managed investment schemes are dependent on whether they cater to retail or wholesale clients. For more information about managed investment schemes please refer to ‘What is a managed investment scheme?’.
What is a retail client?
A retail client covers anyone who does not come within the definition of a wholesale client.
What is a wholesale client?
Generally a wholesale client is someone who satisfies either of these three tests:
- Product value test: the client invests $500,000 or more
- Small business test: the consumer of the financial products is a business which satisfies either:
- Assets test – net assets of more than $2.5m; or
- Income test – gross income of at least $250k p.a. in last two financial years
- The consumer must also have at least 20 employees (for a non-manufacturing business) or 100 employees (for a manufacturing business).
- Professional investor test: this includes, amongst others, Australian Financial Services Licensees, Australian Prudential Regulation Authority regulated bodies, trustees of public superannuation funds, listed entities and persons controlling at least $10m.
In certain situations, an investor who doesn’t satisfy any of these threshold tests can request to be certified as a ‘sophisticated investor’. To achieve this status, the client must satisfy the licensee that they have sufficient financial literacy and are prepared to waive rights to certain consumer protections which would be granted to them as retail clients.
Why is the distinction important?
The tests for wholesale clients clearly envisage more financially savvy and informed investors who have experience in investing and protecting their interests. Therefore, the main benefits of catering to this class of clients are that there are fewer disclosure obligations and compliance costs. Whilst all operators need to be licenced by the Australian Financial Services (AFS), a managed investment scheme dealing with retail clients will also need to be:
- registered with ASIC;
- a member of the Financial Ombudsman Service (FOS); and
- have internal dispute resolution procedures.
In addition, when giving advice to and dealing with retail clients, the licensed operator will need to provide a retail client with:
- a product disclosure statement for the fund;
- a financial services guide;
- a statement of advice if personal financial product advice is given;
- a general advice warning if general advice is given;
- ongoing disclosure of material changes and significant events effecting the fund;
- a periodic statement showing transactions and changes to investment balances; and
- confirmation of transactions.
Finally, depending on the nature of the fund, retail client may also have a cooling off right in relation to an investment in the fund
For any assistance in relation to managed investment funds, please do not hesitate to contact us.