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:
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
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 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 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:
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.
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 firstname.lastname@example.org.