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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 12 – WHOLESALE CLIENTS
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A financial advice provider’s obligations will differ under the new regime depending on whether the client receiving the financial advice service provided is categorised as a wholesale client or a retail client. The most significant difference? If you only deal with wholesale clients, you won’t need a licence and the new code of conduct won’t apply to you.

A major change being made to the scope of what is considered ‘wholesale’ – not all of the wholesale client categories currently available in the Financial Advisers Act 2008 (‘FAA’) will be rehomed in the Financial Markets Conduct Act 2013 (‘FMC Act’). This results in a closer alignment between the ‘wholesale investor’ and ‘wholesale client’ concepts. It will also result in some advisers needing to recategorise existing wholesale clients as retail.

In brief:

In this twelfth in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss the application of the new regime to wholesale clients, including:

  • who are wholesale clients?
  • what is changing?
  • what are the limited rules for dealing with them?

In the Series so far:

1 – confirmation of the proposed reforms
2 – key concepts
3 – the FAP conundrum
4 – key changes to the FSP Act
5 – transitioning to the new regime
6 – offshore advisers
7 – the Code of Conduct and Code Working Group
8 – the new regime for custodial services
9 – the new statutory conduct obligations
10 - the scope of the new regime
11 - corporate advice

In full:

Who are wholesale clients?

A person will be a ‘wholesale client’ in relation to a financial advice service (or a client money or property service) if:

  • The person is an ‘investment business’ (as defined), excluding entities established or acquired with a view to being used as a wholesale investor.

The Bill expands the definition of ‘investment business’ to include entities whose principal business consists of providing a financial advice service, providing a client money or property service, or being a financial adviser. Interestingly, entities that are established or acquired with a view to being used as a wholesale client (as opposed to being used as a wholesale investor) are not expressly excluded from the scope. This may not open a loop-hole many will bother exploiting, but the inconsistency is curious.

  • The person meets specified investment activity criteria, which (in general terms) covers those who have invested or held portfolios worth NZ$1 million or more in specified financial products over the past two years, or who have held a decision-making position within an investment business for two out of the past 10 years.
  • The person is ‘large’ (those with net assets of at least NZ$5 million and/or consolidated turnover in excess of NZ$5 million for each of their last two completed financial years).
  • The person is a ‘government agency’ (as defined).
  • The person is in the business of being a product provider and receives the financial advice service (or receives the client money or property service) in the course of that business.
  • The person is an ‘eligible investor’ in relation to the service, which requires the person to certify as to their previous experience in acquiring or disposing of financial advice products, and have a written confirmation of their eligibility signed by a financial adviser, a qualified statutory accountant, or a lawyer.

The relevant time for determining whether a person is a wholesale client is the time immediately before the service is supplied to the person.

The current ability to opt out of being a wholesale client (other than for eligible investors) is preserved.

What is changing?

Notably absent from the above list is the wholesale client categorisation currently available under the FAA for entities (and their related bodies corporate) that have net assets or turnover of more than NZ$1 million as at the end of their last two accounting periods. These entities are not currently considered wholesale investors under the FMC Act, and will not be considered wholesale clients under the Bill. So non-FSP companies and trusts with net assets of more than NZ$1 million but less than NZ$5 million, who are considered wholesale under the FAA will lose that status under the Bill, unless those assets include at least NZ$1 million of specified financial products.

Also absent is the FAA’s extension provision, which treats any controlling owner, director, employee, agent, or other person acting in the course of, and for the purposes of, a wholesale client’s business, as wholesale by extension (to the same extent as the client is treated as wholesale). That seems odd, when other exclusions from the scope of the Bill include extensions of that nature.

What are the limited rules for dealing with wholesale clients?

A financial advice provider that only deals with wholesale clients does not need to be licensed and will have less onerous duties than those that deal with retail clients. Financial advice providers dealing with wholesale clients must comply with the duties to:

  • Exercise the care, diligence, and skill that a prudent person engaged in the business of giving regulated financial advice would exercise in the same circumstances.
  • Make any prescribed information available.
  • Give priority to the client’s interests. As discussed in our ninth Financial Law Insight, this is, in essence, a conflict of interest management duty.

That’s it, unless regulations impose anything extra. With the new code of conduct only applying to financial advice services given to retail clients, none of the code standards will apply, meaning there are no regulated ethical behaviour or client care obligations a licensee will need to observe. Just how the market will respond to this remains to be seen.

Conclusion

The wholesale client concept has been retained as part of the reforms. We support this. While we have some reservations about the criteria used, the closer alignment with investment-world criteria is a positive.

Irrespective of the criteria applied, licensing for retail financial advice providers means the stakes are raised. Providers wishing to continue operating on a wholesale-only basis once the new regime takes effect will need to take even more care to ensure that their clients fall within the narrower wholesale concept. All providers will need to make a call on the largely unregulated conduct standards to apply when servicing wholesale clients.

Start a conversation

If you would like a specific briefing on the Bill, what the proposed reforms may mean for your business, or would like advice on how the current regime applies, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin  on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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