Wholesale vs Retail Clients

The distinction between wholesale and retail clients is a fundamental part of the financial services regulatory system.  The main effect of the distinction is that most of the disclosure, training and conduct rules under the financial services laws only apply to retail clients.  This means that operating a “wholesale only” business can be simpler and involve lower cost. Similar rules also apply to the need to issue a disclosure document (such as a prospectus) for the issue of debentures or securities.

Wholesale vs Retail Clients Explained

A person is either a wholesale client or a retail client in relation to a particular financial product or service.  However, the distinction is complicated and a person can be both type of client at the same time in relation to different products and services.

According to sections 708 and 761G of the Corporations Act 2001, there are 5 eligibility tests to determine whether or not a client is eligible to be considered wholesale.

Eligibility to be a wholesale client is determined by meeting one of the 5 eligibility tests:

  1. Product value – of over $500,000
  2. Individual wealth – measured in terms of gross income or net assets as certified by an accountant’s certificate
  3. Professional investors – mostly institutional investors and investment managers
  4. Large businesses – as measured by number of employees
  5. Sophisticated investor – as determined by an AFSL holder based on the client’s investment experience.

Again, the criteria applying to each test is complicated and not all tests can be used in all situations. Applying the tests to entities such as trusts (and particularly SMSFs) can also raise difficulties.

Simply meeting an eligibility test might also not be sufficient as regulators are increasingly taking the view that classifying clients with low levels of financial literacy as wholesale might result in a breach of other regulatory obligations (such as those relating to acting fairly).

How we can help

Our team of experts have extensive experience in this area:

  • provide legal advice in relation to the application of the eligibility tests
  • provide legal advice in relation to the effect of wholesale client status on your conduct and disclosure obligations
  • provide legal advice in relation to product design for wholesale products
  • prepare documentation for assessing wholesale client eligibility (such as application forms and sophisticated investor letters)
  • assist with AFSL applications for wholesale only businesses

Retail vs Wholesale Explained

In this expert interview, Partner, David Court, explains what a corporate finance business needs to know about being licensed, and where retail vs wholesale comes into it all.

Sign in to the Hub to watch the full interview.

Insights

Blog update
Blog update
Retail vs Wholesale Clients – Regulatory Concerns and Responses

While there have been some changes to the wholesale client eligibility criteria since 2004, we appear to be reaching a point where a more fundamental reassessment of the distinction between…

Blog update
Blog update
RG 132: Financial Services Compliance Systems For Wholesale Managed Funds

In July 2018 ASIC issued its Regulatory Guide 132: Funds Management: Compliance and Oversight (“RG 132”) which looks into what constitutes an effective and responsive compliance management system for a…

Case study
Case study
What the Storm Financial case told us about wholesale client eligibility

  The decision of the Federal Court in the Storm Financial case (or, to be legally precise, the case of ASIC v Cassimatis (no.8) [2016] FCA 1023) considers a number…