There are two types of clients when delivering financial services and it is important that you understand the difference. The two types are wholesale clients and retail clients.
When applying for an AFSL you need to decide which authorisations you require and that includes selecting which clients you will be providing to. You can only provide services to the type of client you are authorised to provide to.
A retail client is generally any client that does not meet the specific requirements for a wholesale client under the Corporations Act 2001 (Cth).
However, it will also depend on the financial service provided. If the service is for general insurance (for individuals or small businesses) or superannuation the client will always be a retail client even if they meet the requirements for a wholesale client.
While both types of clients are regulated there are specific regulations that are only applicable to retail clients. When providing to retail clients, AFS licensees must follow the prescriptive disclosure, product design, training, dispute resolution, and conduct requirements.
If the client meets one of the five tests under sections 708, 761G and 761GA of the Corporations Act 2001 (Cth) they will be regarded as a wholesale client. Applying the tests to determine whether your client is a wholesale client can be difficult so it is best to first speak to a lawyer.
Product Value Test
The product value test requires that the financial service or financial product being invested in or considered has a value greater than $500,000. The product value test is not applicable to risk-based products (e.g. life insurance) or if the value is obtained from a superannuation fund.
While this is an easy test to apply it can be difficult to determine the value of the financial product or service.
Individual Wealth Test
In this test an individual must meet one of these two requirements:
- own net assets of at least $2.5 million; or
- have a net income in each of the last two financial years of at least $250,000.
This must be certified by an accountant. The accountant’s certificate expires after two years and must be renewed.
Business Size Test
This test applies when the business providing the financial product or service is not considered a small business.
Section 761G(12) of the Corporations Act 2001 (Cth) provides a definition of a small business for this test. It means a business with less than:
- 20 people; or
- 100 people, if it is or includes the manufacture of goods.
A sophisticated investor is a client that an AFSL holder has decided has experience in using financial services.
Section 761GA of the Corporations Act 2001 (Cth) lists the requirements that must be met in order to be considered a sophisticated investor:
- The product must not be a general insurance product, superannuation product or RSA product.
- The product or service must not be provided for use in connection with a business.
- The licensee must be reasonably satisfied that the client has prior experience in using financial services and investing in products that enables the client to examine the different matters listed in the Act.
- The licensee must provide the client with a written statement of the reasons for being satisfied.
- The client must sign a written acknowledgement.
Professional investors are institutional investors with one of more of the attributes listed in the Corporations Act 2001 (Cth). Examples of these attributes includes:
- holding an AFSL;
- being a body regulated by Australian Prudential Regulation Authority (APRA), other than a trustee of any of the things listed in the Act;
- being an entity registered under the Financial Corporations Act 1974; or
- a person who controls at least $10 million.
Deciding which type of client you want to provide your financial service to can be different. Therefore, it is best to speak to a lawyer. For more information contact 1300 337 997 or fill out the form on this page.