AFCA urges adviser paper trail on wholesale client status

Financial advisers and their licensees need to retain both the records and responsibility for their clients being deemed as wholesale investors, according to the Australian Financial Complaints Authority (AFCA).

The complaints authority has told a Parliamentary Committee inquiry that it believes upfront client consents would effectively shift the onus form financial firms and it is therefore necessary to have record-keeping obligations covering how clients met the relevant test.

Discussing responsibility for the wholesale designation, AFCA’s submission states:

“Regardless of where the threshold is ultimately set, it is essential that the adviser retains the records and responsibility for proactive engagement and discussion with their client as to their retail/ wholesale status.”

“We note earlier reviews contemplated regulatory settings involving upfront client consents excluding future access to IDR and to AFCA. Such an approach would shift the onus from the financial firm—who is best placed to make the assessment and understand the implications of wholesale designation—to the consumer/ investor,” AFCA’s submission said.

“Complaints AFCA has dealt with include cases where designated wholesale investors lacked understanding or awareness about:

• how the wholesale product or scheme invested or worked in practice
• the related and underlying risks of the product
• the fact they had been classified as a wholesale client, and
• the reduction in consumer protections associated with the classification.

“From a complaints-handling perspective, it is the individual context in which client consent is sought and obtained that determines whether a particular consumer genuinely understood the implications of and agreed to their classification.

“If some form of consent model were contemplated, it is essential that it does not preclude investors from access to IDR and EDR. A decision or assessment about whether a client meets the definition of a wholesale client should not be left to investor attestations and passive acceptance by the advice provider or responsible entity. Such a decision should be an active decision following an appropriate engagement and assessment with the financial firm maintaining appropriate records,” AFCA said.

“This assists financial firms to satisfy themselves that they have complied with their obligations and supports any future assessment by AFCA of its jurisdiction and to identify any substantive issues about the consent or whether the client met the relevant wholesale test. It also supports AFCA’s systemic issues role to identify and report any systemic issues we identify in complaints handling to the regulators.”