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Retail/wholesale client distinction


Retail/wholesale client distinction

April 1, 2014 8:38 AM | Posted by Richard Batten, Tim Sutton, Thomas Ellicott | Print this page

The retail/wholesale client distinction is central to the current regulatory framework. Retail clients are afforded considerable additional conduct and disclosure protection.

Reforming the retail/wholesale distinction has been on the regulatory agenda for some time, particularly in the wake of the GFC. Experience during the GFC highlighted that wealth and financial sophistication do not necessarily go hand in hand. In 2011, Treasury issued an Options Paper entitled 'Wholesale and Retail Clients Future of Financial Advice'.

Areas of concern identified in the Paper included:

  • outdated product, asset and income thresholds; 
  • the disjunction between client wealth and financial literacy; and
  • uncertainty around the application of the subjective sophisticated investor test under s 961GA.

A number of reform options were countenanced in the Paper, including raising thresholds, indexing, excluding illiquid assets, introducing extra requirements for particular complex products, repealing the sophisticated investor test, or using the sophisticated investor test as the sole determinant of retail/wholesale status. The Paper also raised the possibility of removing the distinction altogether which would be likely to have disastrous implications for the competitiveness of the Australian financial sector if ever implemented.

In the face of FOFA and other reforms to the financial services sector, the issue has remained on the sidelines. The Financial System Inquiry therefore represents a fresh opportunity to deal with the retail/wholesale bugbear. Following the Lehman Brothers case, it is clear that thresholds do not always prove to be a good indication of financial literacy. On the other hand, they do provide certainty for financial service providers and a subjective approach, such as that under s 961GA, is a high risk proposition for providers to implement on the ground. It will be interesting to see whether the Inquiry will have anything to say on this topic and what changes it may recommend.

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