It is often the case that investors (or potential investors) either wrongly believe that they are, don’t know whether they are or whether they can be, wholesale investors. Many want to be wholesale investors. The starting position is that all investors (or potential investors) are retail, unless an exemption applies.
Retail vs Wholesale
There are many reasons why investors want to have wholesale investor status; and why AFS Licensees like to deal with wholesale investors. From an AFS Licensee’s point of view, dealing with wholesale clients means that it doesn’t need to supply certain disclosure documents such as a product disclosure statement (PDS) to potential investors, it doesn’t have to join an external dispute resolution scheme (“EDRS”) as wholesale investors are not generally afforded access to an EDRS, and the choice of financial products is more diverse. From the investors’ point of view, they have access to a greater range of products which are often at a higher risk adjusted return.
However, a common mistake is to assume that, if an AFS Licensee deals with wholesale investors, because the wholesale investor is not provided with the same protections as a retail investor under the Corporations Act 2001 (Cth), the AFS Licensee does not have a duty of care or a fiduciary duty. This is not the case, as the general law duties still apply so that all investors are owed a fiduciary duty by an AFS Licensee who is giving advice or providing a product or service. The duty owed to wholesale investors who are experienced in the relevant area is not as high as the duty owed to a retail investor, but there is still a duty, and failing to recognise this can lead to costly litigation if things go wrong.
What are the Exemptions to an Investor being Retail?
Broadly speaking, these exemptions are:
Most AFS Licensees authorised to provide financial services to wholesale investors rely on the Individual Wealth Test, but there are extra steps that can often be overlooked when relying on this exemption. So, what does the investor need to do?
A qualified accountant is required to provide a certificate attesting to the investor’s gross annual income or net assets, before the investor can receive any advice or products. The definition of “qualified accountant” means an accountant who is a member of either Chartered Accountants Australia & New Zealand, CPA Australia or the Institute of Public Accountants, and who is subject to the relevant body’s Continuing Professional Education (CPE) requirements and has confirmed in writing to the relevant body that they comply with the body’s CPE requirements. It is possible to obtain a certificate from a foreign accountant, but strict rules limit this to professional bodies in the UK, US, New Zealand, Canada, England and Wales, Ireland and Scotland. Once a certificate has been obtained, it is valid for a period of two years. On the expiration of the certificate, if it is not renewed, the investor is deemed to be a retail investor.
There is often some confusion around the time at which an investor is deemed to be wholesale, and what happens if their circumstances change or there is a delay between the advice and the provision of the product or service. Edelman J in ASIC v Cassimatis  FCA 1023 held that if an investor was a wholesale investor at the time that the advice was given, then that was adequate for the purpose of determining if the investor was wholesale or retail. It was irrelevant what the circumstances may have been when the investment was made; time is of the essence in relation to when the advice was provided.
How are Assets and Income Calculated?
In relation to the Individual Wealth Test, ASIC has not provided any guidance on the terms “assets” and “income” as it considers this to be a professional question for the accountant to answer. However, it is reasonable to assume that the ordinary meanings of the terms as contained in the Macquarie Dictionary would be applicable.
Problems arise when an investor has assets which are negatively geared, or they own assets with another person. At law, there is a difference between assets owned jointly, and those owned as tenants in common. The legal position in relation to tenants in common is that the assets’ ownership is essentially split into two parts (either equally or unequally) and the parties set out which part belongs to which party. Determining whether the asset threshold amount of the Individual Wealth Test is met for an individual investor where their assets are held under a joint tenancy is not clear, as it is possible that one or both joint owners could be considered to own 100 per cent of the underlying value of the asset. Ultimately, this is almost certainly a question for the accountant, but it would also be prudent for AFS Licensees to be aware of the differences for their own risk management.
Another high risk area is when an organisation receives an application from joint applicants. A common mistake is that if Mr and Mrs Example own a property worth $3 million, or have a joint income of more than $250,000, this would satisfy the Individual Wealth Test. It does not. Each investor must be assessed on their own merits, and each investor must satisfy the requirements in their own right.
We have highlighted some key areas to consider for both organisations and investors alike, but ultimately it is up to the organisation to ensure that it has controls in place that assist in correctly determining the category of investor in line with their licence authorisations.