Retail or wholesale client: why it matters for CFDs

Side by side

The two columns are not mirror images. The left one lists what ASIC’s rules give a retail client; the right one lists what Moneysmart says can happen to a trader treated as wholesale.

Who the Act treats as a retail client

Section 761G of the Corporations Act draws the line. For a financial product that is not general insurance, a superannuation product or an RSA, a person is treated as a retail client unless at least one of four things applies:

• the price of the product, or the value of the product a service relates to, is at or above an amount set in regulations, which may also say how that price or value is worked out;
• the product or service is for use in connection with a business that employs at least 100 people if it is or includes making goods, or at least 20 people otherwise;
• it is not for use in connection with a business, and before it is provided the person gives the provider a copy of a qualified accountant’s certificate, given within the previous 6 months, stating that the person has net assets of at least an amount set in regulations, or at least a regulated amount of gross income in each of the last 2 financial years;
• the person is a professional investor.

Section 761GA adds a route for sophisticated investors. Where the provider is a financial services licensee, and the product is not general insurance, a superannuation product or an RSA and is not for use in connection with a business, it is not provided to the client as a retail client if the licensee is satisfied on reasonable grounds that the client’s previous experience lets them assess its merits, its value, its risks, their own information needs and the adequacy of the information from the licensee and the product issuer; the licensee gives the client a written statement of its reasons, before or when the product or advice is provided; and the client signs a written acknowledgment, before or when the product or service is provided, that the licensee has not given them a Product Disclosure Statement or any other document Chapter 7 of the Act would require for a retail client, and has no other obligation under that Chapter that it would have to a retail client.

In a proceeding about a matter arising under Chapter 7 of the Act that is not a prosecution, where it is alleged that such a product or service was provided to someone as a retail client, the Act presumes it was unless the contrary is established.

ASIC on client classification

ASIC made the order after finding that CFDs had caused, and were likely to cause, significant detriment to retail clients. When it took effect, ASIC said it would be watching how providers classify their clients:

What RG 227 expects before an account opens

RG 227 sets benchmarks that bear on who a CFD is offered to. An issuer addresses them in its disclosure on an ‘if not, why not’ basis.

• Qualifying the investor. An issuer should assess a prospective investor against qualifying criteria that look at their understanding of, and experience with, the product.
• A practice account. The issuer should also offer a practice account that lets investors trade on a virtual basis for a time before opening a real one, and that mirrors how its real accounts work.
• Advertising. CFD advertising should match the issuer’s client qualification policy, so it should not aim at an unreasonably broad audience or give the impression that CFD trading is likely to suit an unlimited range of investors.

RG 227 also asks that advertising carry a prominent warning that CFD investors do not own, or have any rights to, the underlying assets, such as the right to receive dividends.

The binary options ban

Binary options are banned for retail investors: ASIC has banned their issue and distribution to retail clients. The 2022 instrument on that ban says ASIC’s binary options product intervention order stays in force until it is revoked.

Moneysmart describes a binary option as a bet on the outcome of an event, such as whether a company’s share price will be above its current price in an hour. If the bet is right, the trader receives a fixed payment; if it is wrong, they lose their money.

This is where the wholesale label gets used. Moneysmart warns that some binary options providers may try to classify a retail client as wholesale so they can trade binary options, and its advice is direct: do not agree to be treated as a wholesale client just to get access to them. It also warns that offers to trade binary options may be a scam: some scammers use binary options to steal money, so a phone call, an online ad or a social media post offering binary options trading calls for caution. And if the trade runs through an unlicensed overseas company and something goes wrong, Moneysmart says there will be no help to be had. Spotting one is covered in checking a broker, and scams.

Independent advice

In its explanation of how forex trading works, Moneysmart suggests getting independent advice from a licensed financial adviser before putting money on the line. The protections a retail client keeps are set out in full in the protections on a retail CFD account, and summed up on the home page.