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Support for wholesale change, except from banks

Banks have slated a proposal to require investors to opt in to wholesale status – a move that the rest of the financial services sector supports.

Wednesday, May 11th 2016, 6:00AM 2 Comments

by Susan Edmunds

The options paper released for the review of the Financial Advisers Act suggested the change.. There has been concern that the bar is too low for clients to be counted as wholesale investors.

At present, a client qualifies to be treated as wholesale if they own financial products of $1 million, if they are an entity with $1 million in net assets over the last two accounting periods or operate as an investment business.

If they fit that description but want to be treated as a retail investor, they need to opt out of being wholesale.

Some advisers have found the definition unwieldy and have not been sure how to deal with it.

With wholesale clients, they do not have to give a disclosure statement and six standards of the Code of Conduct do not apply, including those covering borrowing from clients, the requirement to agree the nature and scope of service, prove advice suitability and having a complaint process.

That has led some advisers to fear that they could be stung in future for the advice they offer wholesale clients.

The Ministry of Business, Innovation and Employment, said requiring people to opt in to being wholesale clients would provide greater transparency.

“This would ensure that consumers would be afforded the same access to redress as a retail client. Professional or truly sophisticated investors would likely opt-in to facilitate lower compliance costs.”

But the banks rejected this. ANZ said the current process was operating well and protected clients while offering a lighter-touch regime for more sophisticated clients.

“A change would create an unnecessary and expensive compliance burden,” ANZ said. It said it was worried about the prospect of having to reclassify all its existing customers.

ASB, BNZ and Westpac all said there was no evidence the opt-out system was causing client harm.

But most other submitters said opting in would be better.

AMP said it treated all clients as retail. “We consider that it is important that if protections are not to apply to a category of person that they are made fully aware of this. Whilst it would be an additional obligation on an adviser to require clients to opt into this category we consider that this is appropriate, and would pose very few problems for advisers. It is important to remember that a large account balance in financial terms does not necessarily indicate a wholesale investor.”

Craigs Investment Partners agreed it would offer more protection and IFA said there would be no negative implications. Milford said it would be a positive move for consumers.

An MBIE spokeswoman said recommendations would be made soon.

“MBIE will make its recommendations to the Minister of Commerce and Consumer Affairs by July 1.  It is then for the Minister to consider the proposals. If the Government decides to change the legislation, the normal legislative process would follow, including the Select Committee process. Implementation would follow the passage of the legislation and the timeframe depends on the scale of change.”

Tags: Financial Advisers Act MoBIE

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Comments from our readers

On 11 May 2016 at 9:33 am AFA said:
Susan, your definition of Wholesale investor ($1 million in financial products) applies only to DIMS. For financial advice purposes, a client is a Wholesale investor if they own or control net assets of $1 million (which includes property i.e. the family home). And then, of course, there is a third definition of Wholesale investor in the legislation covering offers of securities made without issuance of an investment statement.
On 11 May 2016 at 1:14 pm Murray Weatherston said:
Your opening paragraph is not correct. It's not the banks against the rest.

For once SIFA in on-side with the banks as our submission was that the opt-out provisions should apply.

I think there may have been a few other submitters who said the same.

We did however submit that the various definitions in FAA and FMCA should be standardised so that the definitions were the same across both Acts.

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