ASIC warning on miscategorising SMSF advice

The Australian Securities and Investments Commission (ASIC) has warned it will take action against financial advisers who miscategorise Self Managed Superannuation Funds (SMSFs) as wholesale clients.

In a move to clarify its approach to the treatment of SMSFs in terms of them being treated as retail or wholesale clients by withdrawing a 2004 assessment, the regulator has made clear that it wants to ensure there is no denial of the protections granted as a result of SMSFs being regarded as "retail" clients.

"Given the importance of the retail client consumer protections, ASIC will take regulatory action where financial service providers miscategorise their clients and, for example, treat investors as wholesale clients based on net assets of $2.5 million without a certificate from a qualified accountant," the ASIC announcement said.

The regulator pointed to the existing regime under which a trustee of a SMSF will be classified as a retail client under the Corporations Act unless the fund holds net assets of at least $10 million at the time the service is provided.

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If a financial service does not relate to a superannuation product, the general test for determining whether the trustee is a retail or wholesale client applies under the Corporations Act. Under the general test the circumstances in which the trustee will be a wholesale client include if the trustee has a certificate from a qualified accountant stating they have net assets of $2.5 million or if the value of the investment is at least $500,000.

"ASIC's revised approach means that, for example, where the trustee of an existing superannuation fund receives advice about how to invest the fund's assets, ASIC will not take action if the person providing the advice determines whether the trustee is a wholesale client based on the general test mentioned above (e.g. if the trustee has net assets of at least $2.5 million), rather than applying the higher $10 million net asset test. ASIC will adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund."

"Although ASIC will not take action where such financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test), this will not affect any private rights of action that may be available to third parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks," the ASIC announcement said.