Wholesale Clients and MDAs…Like Oil and Water

Here at MDA Guru we often get asked about ‘Wholesale’ clients and how an adviser can include these clients in a Managed Discretionary Account (MDA) arrangement. Similar to trying to mix oil with water, these types of clients just don’t seem to want to gel with MDAs from a compliance perspective.

So why would you? A good reason to do this would be that an adviser would like their wholesale client base to receive the same portfolio administration efficiencies that their retail client base is receiving under an MDA arrangement. From an operations point of view this would make sense. An adviser could make changes to all their clients’ portfolios at once regardless of what type of client they are.

We have seen in the past that advisers were concerned that if their wholesale client signs into an MDA arrangement they then would lose their wholesale status and therefore must be treated as a retail client.

The problem or confusion arises when we breakdown what is an MDA and who is the legislation designed to protect. MDAs are regulated by RG 179 and in short allow a Managed Investment Scheme (MIS) to operate without a Responsible Entity (RE) and without having to provide a Product Disclosure Statement (PDS), subject to a number of conditions being met. This effectively gives an adviser the ability to make changes without having to provide and receive back a signed Record of Advice (RoA). This same benefit is something that an adviser can already do when providing advice to a wholesale client as there is no requirement to provide a SoA or RoA to wholesale clients.

Under the heading “Purpose of this guide” RG 179.4 clearly states, “This guide sets out how we will regulate MDAs provided to retail clients under the Corporations Act.” Also, under the heading “Who does this guide apply to?” RG 179.9 states that it does not apply to Wholesale clients.

Ok, that is pretty straight forward although the legislation goes on further to provide us with the following;

“MDA services provided only to wholesale clients”

RG 179.11 However, if you offer or issue an MDA only to wholesale clients, you do not need to rely on our relief to provide these services because the managed investment scheme provisions in Ch 5C of the Corporations Act and the disclosure requirements in Pt 7.9 of the Corporations Act only apply when financial products and services are offered or issued to retail clients.

Which is fine and consistent with the previous guidelines mentioned above. Now here is where it can get confusing (apologies for the longer extract from RG 179 but this will illustrate the matter);

“MDA services provided to both retail and wholesale clients”

RG 179.12 If you issue an MDA to both retail and wholesale clients, you will need to rely on our relief because the exemptions in the Corporations Act from the requirement to register a managed investment scheme may not apply—that is:

(a) the exemption under s601ED(2)—because this requires that all clients are persons to whom a Product Disclosure Statement (PDS) is not required to be issued; and (b) the exemption under s601ED(1)—because you may have, or be taken to have, more than 20 members; or you may qualify as a person who is in the business of promoting managed investment schemes.

RG 179.13 If this is the case, and you issue an MDA to both retail and wholesale clients under our main relief (as set out in RG 179.41), you do not need to comply with certain requirements for the MDAs that you provide to wholesale clients

RG 179.14 Some of the Corporations Act requirements, which are modified by our relief or on which the conditions of our relief are based (e.g. the requirements relating to the Financial Services Guide (FSG), do not apply to financial services provided to wholesale clients. Therefore, these conditions do not apply to MDAs issued to wholesale clients.

RG 179.15 The conditions and modified provisions under our relief that have a general application will apply to MDA services provided to wholesale clients because they cannot be separated from the conditions that otherwise apply to MDA services provided to retail clients. For example, you must have a specific Australian financial services (AFS) licence authorisation to issue an interest in a managed investment scheme limited to MDA services, or miscellaneous financial investment products limited to MDA services. You must also maintain adequate documented compliance measures for all MDA services.

Ok, you made it this far but probably gave up at some point and skipped over the last couple of regulations. I started this article six months ago so I understand. So, what is the above trying to say? If you want to provide discretionary advice to both wholesale and retail clients then you will require to operate under the relief of RG 179. This is because you are not providing a PDS and not operating under a Responsible Entity (RE). This is what differentiates the MDA from providing an MIS scheme similar to a Separately Managed Account (SMA). You will still be exempt from having to provide wholesale clients an FSG and an SoA however will require to meet most RG 179 MDA reporting requirements. The main exception is not having to provide an annual RoA for ongoing suitability requirements to wholesale clients.

If an adviser wanted to provide a discretionary service to wholesale clients ONLY then MDA authorisations would not be required. This could be offered to clients via an Investment Management Agreement and therefore RG 179 requirements would not apply. Now the issue to resolve is: when does your service become a product? The service could be deemed a Managed Investment Scheme (MIS) in which you would require a Responsible Entity and PDS, particularly if the client’s investments are pooled or used in a common enterprise. If the scheme has over 20 clients then the MIS would be required to be registered.

If you are managing a large net wealth wholesale client in an Individually Managed Account (IMA) with an Investment Management Agreement and the client’s assets are not pooled or part of a common enterprise with other investors then all should be fine however you would have to make sure that you are not in the business of promoting managed investment schemes or in association with someone who is. If you are entering wholesale clients only into model portfolios it is possible that ASIC may determine that you are operating an MIS even though the assets may not be pooled as this could be considered a common enterprise.

So, it is safe to say that your wholesale clients will not lose their wholesale status if they enter into an MDA agreement. RG 179 MDA regulations are clear that the regulations are intended for retail clients however they do provide guidance when advising and dealing in MDAs to both client types. If you wanted to advise and deal discretionary services to wholesale clients only then we suggest that you seek legal advice on the best way to provide such a service.

If you have any questions or are looking for further guidance in navigating the world of managed accounts then please reach out to us at MDA Guru. We are here to help.

www.mdaguru.com.au