Popcorn Required? AFCA vs ASIC, SMSF $10 mil AUM benchmark
Introduction
Today’s blog post focusses on the potential unintended consequences of the Australian Financial Complaints Authority (‘AFCA’), Australia’s financial services Ombudsman, reinforcing its stand that SMSF trustees and members will only be viewed as wholesale clients if their fund has $10 million or more in assets.
In a recent AFCA determination dated 25 June 2024, reference case number 12-00-1080719, a Self-Managed Superannuation Fund (‘SMSF’) was deemed a retail client because it held less than $10 million in net assets.
An Independent Financial Advisor article dated 25 June 2025, confirms that Shail Singh, AFCA Lead Ombudsman, Investments and Advice, said the classification of wholesale and retail investors has been a recurring topic for AFCA and has been addressed on numerous occasions, most recently in the regulator’s March member forum.
Mr Singh has confirmed that “AFCA applies the law as it stands. This is spelled out in the Corporations Act, where section 761G(6) says that when a financial service relates to a superannuation product, the super fund must hold $10 million in assets to be treated as a wholesale investor”.
Background
Section 761G of the Corporations Act 2001 (Cth) (‘Corporations Act’) outlines the tests for determining whether a client is retail or wholesale:
Under s761G(6), a trustee of a superannuation fund is a wholesale client only where the fund has net assets of at least $10 million.
Under the general wealth tests in s761G(7), an individual may qualify as wholesale if they have net assets of at least $2.5 million or gross income of at least $250,000 per annum for the past two years, as certified by a qualified accountant.
On 8 August 2014, ASIC issued a no-action position (14-191MR) indicating that it would not take enforcement action against licensees who classify SMSF trustees as wholesale using the $2.5 million asset test, even where the financial service ‘relates to’ a superannuation product. The ASIC media release 14-191MR is paraphrased below:
‘where the trustee of an existing superannuation fund receives advice about how to invest the fund’s assets, ASIC will not take action if the person providing the advice determines whether the trustee is a wholesale client based on the general test (e.g. if the trustee has net assets of at least $2.5 million), rather than applying the higher $10 million net asset test. ASIC will adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund’.
AFCA Notes the ASIC ‘Warning’
In the recent AFCA determination (25 June 2024, reference 12-00-1080719), AFCA highlights the following text as a warning from ASIC:
‘Although ASIC will not take any action where financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test), this will not affect any private rights of action that may be available to third-parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks’.
The highlighting by AFCA of the ASIC ‘warning’, was issued on 25 June 2024 as part of the AFCA determination, and the text above is taken directly by AFCA from the ASIC media release 14-191MR of August 2014.
AFCA Further Views on ASIC Guidance
The AFCA panel in the 25 June 2024 AFCA Determination considers that ASIC 14-191MR is not a definitive statement by ASIC that the general wholesale client test applies to SMSF trustees in relation to financial services that these trustees receive. AFCA says that instead, ASIC states:
ASIC’s belief there is legal uncertainty on the issue; and
ASIC will not take regulatory action due to the legal uncertainty.
The AFCA panel highlights that ASIC’s position does not affect the legal rights of affected trustees of superannuation funds (including SMSFs) to pursue any available private causes of action.
Unintended Consequences
I believe the arguable divergence between ASIC and AFCA on this topic creates a significant compliance and dispute-resolution risk for Australian Financial Services Licensees (AFSLs) that operate both retail and wholesale financial services under a single licence.
Anecdotally, I understand that some investment managers are now excluding SMSFs from investing in wholesale schemes unless the SMSF meets the $10 million net asset test. It is estimated that only around five per cent of all SMSFs would qualify under the $10 million net asset test based on 2021 data. Therefore it is arguable that closing out wholesale managed investment schemes by funds managers could become even more of a challenge in the forward 12 month period if these managers directly apply the AFCA guidance.
This type of decision by AFSL holders to limit investors based on the SMSF $10 million net asset test limits the amount of capital available for Australian private wholesale managed investment schemes, for example in asset classes such as venture capital, private real estate and private equity. This is at a time of recent uncertainty for SMSF trustees based on the floated changes to Superannuation tax rules that have recently been shelved by Treasury (for example the taxing of unrealised capital gains).
From what I can also gather, there are potentially quite a few challenged Australian private credit funds in the market currently, holding the capital of SMSFs of funds that do not meet the $10 million net asset test.
If you follow AFCA’s logic that ASIC’s position does not affect the legal rights of affected trustees of superannuation funds (including SMSFs that don’t meet $10 million net asset test), these SMSF trustees can potentially pursue any available private causes of action in the event of a dispute with the AFSL holder managing any affected wholesale managed investment scheme.
ASIC AFSL Expectations
As highlighted in a recent post, an AFSL holder must comply with the General Obligations pursuant to s912A(1) of the Corporations Act (‘General Obligations’) from the time ASIC grants the AFSL, and then on an ongoing basis per ASIC Regulatory Guide 104. A key component of the General Obligations and listed as ‘item a’ of this section is that a licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly. With the emerging commentary of this SMSF topic, AFSL Boards should also consider how they are meeting their obligations under this section and consider their responsibilities to their SMSF investors that may not meet the $10 million net asset test.
Industry Response and Observations
It appears most of the industry is now adopting a cautious stance on this topic, monitoring AFCA’s approach and awaiting further regulatory clarification before implementing major structural changes. Industry peak bodies have also asked for alignment between ASIC and AFCA to restore regulatory certainty, however no formal resolution has yet been announced.
Conclusion
This area of the law regarding SMSF and the meeting of the $10 million net asset test can be complex and in the first instance, any AFSL holders should consider seeking external legal counsel on this topic to enhance their understanding.
I have a trusted panel of lawyers I can introduce interested parties to, that specialise in providing financial services legal advice.
From an enterprise risk perspective, AFSL Boards should be alive to this emerging issue. If you have some wholesale funds that are challenged, or Corporate Authorised Representatives that may not be up to speed on this topic, it could be a good time to get active and review your risk matrix and register.
It appears that ASIC will not take any action where financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in net assets (provided that the trustee is a wholesale client under the general test).
It appears that AFCA deems an SMSF a retail client if it holds less than $10 million in net assets.
This potential divergence between AFCA and ASIC creates the opportunity for the creation of interesting case law over the next few years.
If you are a company board holding an AFSL and would like to discuss how I can assist your company with enhancing your governance so that you can better manage your compliance risks and protect your investors, please contact me for an obligation free discussion. I can assist your company with:
Responsible manager;
Compliance committee;
Company director;
Compliance review; and
Governance committee services.
I’d be honoured to assist your company meet its ongoing compliance obligations relating to your AFSL risk management and give your customers and investors the comfort that you are managing your business with institutional grade corporate governance.
Thank you
Thank you to the Rawlings Bolton compliance team for assistance with content for this blog post.
Disclaimer
This content of this blog post is not legal advice. The information provided is opinion and for general purposes only and is not a substitute for personalised legal counsel.
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