AFCA urges adviser clarity on SMSF wholesale investor test

The Australian Financial Complaints Authority (AFCA) is urging financial advisers to gain clarity and better understanding on whether the wholesale investor test applies when advising SMSFs.

Even if SMSF trustees have extensive investment experience, an SMSF is still regarded as a retail investor if the fund's asset base is below $10 million, AFCA lead ombudsman Shail Singh and senior ombudsman for investments and advice Patrick Hartney say.

"AFCA applies the law as it stands. This is 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," they told the recent AFCA Member Forum.

"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."

They added that AFCA's primary concern must be the legal classification of the SMSF as set out in the law in making a determination on a complaint.

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

In August 2014, ASIC said it would not enforce the wholesale classification requirement to SMSFs.

However, AFCA said that ASIC's position does not limit consumer action and that 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," AFCA said.

Separately, AFCA began accepting complaints relating to buy-now-pay-later (BNPL) products, including low-cost credit contracts on June 10.

As of 10 June, BNPL products are regulated under the National Credit Act and BNPL providers must hold an Australian Credit Licence. AFCA membership is mandatory for any holder of an Australian Credit Licence.

BNPL products are regulated under the National Credit Act and BNPL providers must hold an Australian Credit Licence.