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Wholesale rules a missed opportunity

There is disappointment that legislation looks to have given up the chance to tighten rules governing wholesale financial advice.

Thursday, May 18th 2017, 6:00AM 2 Comments

by Susan Edmunds

The Financial Services Legislation Amendment Bill keeps the same set of "wholesale client" definitions as exist under the Financial Advisers Act, including a threshold that dictates any entity with net assets over $1 million will qualify.

That has prompted concerns that many property-owning Auckland family trusts may qualify. Those dealing with wholesale clients do not have to meet the same regulatory obligations as advisers catering for the retail market.

By comparison, the Financial Markets Conduct Act bumped up the "wealthy person" test under the old Securities Act from net assets of $2 million to $5m when it was introduced.

That was expressed at the time as being partly to remove mortgage-free homeowners and Lotto winners from being automatically treated as wholesale.

The FMCA definition only applies to financial products, not financial advice services.

Jeremy Muir, a partner at Minter Ellison Rudd Watts, said it was not clear why that distinction had been allowed to continue.

He said the fact that the IMF and FMA had both expressed interest in the size of the wholesale market, and oversight of it, could be expected to put some pressure on lawmakers to align the definitions.

"The question for MBIE is whether they want to tinker around the edges on issues like this, or stay focussed on putting through the more structural change."

Bradley Kidd, of Chapman Tripp, said the definitions should be the same.  "Given the relative value which the family home now represents, I can see why some would say the $1m might now be too low.  Balanced against that is that providers may choose not to rely on that category in any event, and there is also an ability to opt out of wholesale status as well."

Sue Brown, who was formerly with the FMA and now operates Sue Brown Solutions, said aligning the two definitions would promote investor, adviser and wider market understanding and reduce the capacity for mis-classification of investors.

Compliance expert Barry Read said he would have liked to have seen the wholesale bar made higher. But he said advisers could still offer "wholesale" clients a retail service, if that was what they deemed appropriate. 

The IMF said in its recent report that regulation of New Zealand investors was well developed but there was scope to consider broadening its perimeter, and wholesale fund management could be brought under the FMCA.

The FMA asked in its Strategic Risk Outlook that it wanted to debate the extent to which its regulatory powers should look at wholesale market conduct beyond the fair dealing provisions of the FMCA.


Tags: wholesale

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Comments from our readers

On 18 May 2017 at 1:04 pm AFA said:
The situation is made even more confusing in that under the FA Act, a person is a Wholesale client for the purposes of giving financial advice if they have net assets of $1 million plus. But for the purposes of offering a DIMS, a person is a Wholesale client only if they own or control "specified financial products" totalling $1 million plus. Obviously that excludes the family home........
On 18 May 2017 at 5:21 pm Murray Weatherston said:
Can someone tell me what the problem is about having a number of definitions for "wholesale" as far as advisers are concerned?
Is there a worry that retail advisers will arbitrage the regulations?
Or is the worry that some people who qualify under one of the arms might not be "competent" enough to be treated as wholesale?
If the latter what makes anyone think raising the limit to $x million gets rid of the problem - what about the winner of this week's $22 million Powerball?
I would have thought advisers should be arguing for the continuation of a number of arms. Or are advisers all really would-be regulators?

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