AFCA warns advisers of risk of misclassifying wholesale investors
The Australian Financial Complaints Authority (AFCA) has told a parliamentary joint committee that it is insufficient for financial advisers to not thoroughly check whether a person qualifies as a wholesale investor.
Appearing before the Parliamentary Joint Committee on Corporations and Financial Services on 4 October, AFCA’s lead ombudsman for investments and advice, Shail Singh, discussed the wholesale investor and wholesale client test.
This inquiry is exploring possible changes to the wholesale test in light of a growing number of consumers reaching the sophisticated investor threshold as a result of increased residential property values.
Given the complexities of being classed as a wholesale investor, Singh said advisers have a duty to ensure individuals are not being misclassified. This is a factor that will be considered if a dispute later makes its way to AFCA.
He said: “It is not merely enough for the adviser to look just at the certificate and say, ‘Well the $2.5m mark has been hit’. They still need to check if this particular consumer understands the consequences of being classified as a wholesale investor and they have ethical duties to do so as well.”
Wholesale investors typically forfeit a large volume of consumer protections available to retail investors and can invest in “riskier” products such as private equity, unlisted bonds and venture capital opportunities which may be illiquid and potentially incur greater losses.
Currently, if a firm offers both retail and wholesale advice, then they need to join AFCA and their wholesale investors are able to submit a complaint. But if the firm offers work with wholesale clients, then AFCA membership is voluntary and its investors are assumed to know they have foregone the retail client protections.
AFCA may not necessarily accept a complaint from a wholesale investor unless there are compelling reasons for it to do so.
This was clarified further in a recent review of AFCA by Treasury where one recommendation from that, Shail told the committee, was complaints should be excluded from these types of investors unless they had been misclassified.
The review stated: “AFCA should exclude complaints from sophisticated or professional investors, unless there is evidence that they have been incorrectly or inappropriately classified.”
Expanding on this, Shail said: “We recently had a review by Treasury and that recommended we should be excluding complaints from professional and sophisticated investors unless they are misclassified. It didn’t talk about wholesale by net worth at all.
“If we think there has been a misclassification or an allegation of misclassification, then we progress the complaint. If we think that the financial firm has followed all relevant processes and the person is truly wholesale and knows of the consequences, then our approach would be to exclude those matters under our discretion.”
Possible reasons that AFCA would look into a case include a failure by the adviser to inform clients about the wholesale classification implications, failure to assess a client’s suitability for the classification, inappropriately recording a trustee as a wholesale client, and misclassifying a retail client as wholesale.
AUTHOR
Laura Dew
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