When can SMSFs be treated as wholesale?

It’s a vexed question as to when SMSFs can be treated as wholesale investors. Here, senior AFCA representatives run through what financial advisers need to know.

The classification of wholesale and retail investors has been a recurring topic of discussion in the financial advice industry, to put it mildly.

Some confusion clearly remains about how self-managed super funds are classified, as evidenced by complaints to the Australian Financial Complaints Authority (AFCA), the authority says. Accordingly, the dispute resolution scheme tackled this topic at its most recent Member Forum, to help advisers understand when an SMSF can – or can’t – complain to AFCA.

The bottom line, says AFCA, is that, under the law, if an adviser provides advice to a trustee in relation to an SMSF, it must be treated as a retail client unless the SMSF has $10 million or more in assets.

First up, Shail Singh, lead ombudsman at AFCA, and Patrick Hartney, senior ombudsman, investments and advice, set out the regulatory framework.

AFCA applies the law as it stands, spelled out in the Corporations Act, where Section 761G(6) says that when a financial service relates to a superannuation product, the super fund must hold $10 million in assets to be treated as a wholesale investor.

Further, Section 761G(7) – which sets out an assets, income or investment threshold wholesale test – specifically does not apply if the financial service relates to a superannuation product, such as an SMSF.

This means SMSFs do not automatically meet the wholesale classification test based on the trustee’s income or asset levels outside of the fund. Instead, classification hinges on whether the fund itself surpasses the $10 million threshold.

This means that even if trustees have extensive investment experience, the SMSF is still regarded as a retail investor if the fund’s asset base is below $10 million.

ASIC indicated in August 2014 that, as a regulator, it would not be enforcing the wholesale classification requirement. But it noted that this position did not eliminate the legal risk for firms, with consumers still able to pursue “private action” – which includes complaints to AFCA.

When it comes to how AFCA applies the law, Singh and Hartney explained that AFCA’s primary concern must be the legal classification of the SMSF as set out in the law, to determine how it considers a complaint.

“That is not to say the level of sophistication of an investor is ignored in our process, should the complaint be accepted,” they said. “AFCA does consider the complainant’s sophistication when weighing the appropriate level of compensation if a complaint is upheld.”

In the case 12-00-923475/12-00-108719, for example, an AFCA panel of decision-makers did find that a wholesale classification was incorrect, but it still took into account the complainant’s level of sophistication, reducing the amount of compensation. AFCA uses three-member panels in some cases, with the panel made up of an ombudsman; someone with industry experience; and someone with a consumer perspective.

Key takeaways for financial advisers

• Asset threshold is the key factor: An SMSF must have assets exceeding $10 million to be considered non-retail.
• ASIC’s position does not limit consumer action: SMSF trustees can still pursue complaints through AFCA, if the fund has less than $10 million in assets.
• Sophistication matters in compensation, not classification: If a complaint is upheld, investor sophistication may reduce compensation but does not alter the retail classification.

By keeping these principles in mind, Singh and Hartney said, financial advisers can better navigate risks while maintaining trust and transparency with SMSF clients.