ASIC Implements New Regulations for Wholesale Clients

The regulator has excluded the ‘price and value test’ for issuers of CFDs.

As market participants wait for the Australian Securities and Investments Commission (ASIC) to implement its proposed leverage restrictions for contracts for differences (CFDs), the regulator has implemented new regulations regarding wholesale clients.

In particular, the regulator has excluded the ‘price and value test’ for issuers of CFDs. The price and value test is one of the tests used by CFD issuers when classifying customers as wholesale clients. 

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In Australia, wholesale clients are similar to professional investors in Europe and may have access to a wider range of investments, but they don’t have the same level of consumer protections that apply to retail clients.

Specifically, the price and value test provided by s 761G(7)(a) of the Corporations Act 2001 (Cth) allows licensees to classify clients as wholesale where the price or value of a financial product provided to a person exceeds AU$500,000. The amended regulations do not affect other wholesale investor tests.

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According to a statement prepared by Sophie Gerber, a Director at Sophie Grace and TRAction Fintech: “The rationale behind the amendment appears to be that the notional value of AU$500,000 under a CFD could be achieved with a modest initial margin.”

“Clients who are classified as wholesale are excluded from certain regulations under the Corporations Act including issuing of disclosure documents including Product Disclosure Statement and Financial Services Guide; ability to lodge complaints with AFCA; ensuring staff dealing with clients hold appropriate RG 146 courses and the treatment of client money.”

What should CFD issuers do next?

All ASIC licensees that issue CFDs should review their wholesale clients and determine their classification test. If they were classified as a wholesale investor using the price and value test, then the licensee should check whether the client may meet any of the other requirements, which can be found here.

“Where it is no longer appropriate that the client be classified as a wholesale investor, the licensee should inform the client of the reclassification including issuing disclosure documentation and advising the client of his or her new customer protections,” Gerber said.

“A reconciliation of client money should also immediately occur to ensure that client money which was previously classified as wholesale adheres to the rules for the treatment of retail client money.”

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