Increasingly outdated investor definitions are encouraging more dodgy product providers to approach cashed up investors and forcing ASIC to take more action than they normally would, according to the regulator’s senior executive leader of investment managers, Rhys Bollen.
According to the Corporations Act anyone earning $250,000 for two consecutive years or holding $2,500,000 in net assets can be classified as a wholesale investor, meaning they can accept securities offers without receiving basic protections afforded to retail investors.
The benchmarks used, however, are almost two decades old, so the number of investors graduating from retail to wholesale or ‘sophisticated’ has increased markedly. Product providers therefore have a much larger pool of cashed-up, knowledge poor investors to target.
“It hasn’t been updated in close to 20 years,” ASIC’s Bollen tells Professional Planner. “In that time average income has doubled and house prices have more than doubled so it is out of date.”
As a result, he explains, ASIC is being asked to expend more and more resources on the problem.
“It does mean we’re taking on cases where we haven’t in the past,” he says. “Mayfair  is an example; it is a wholesale product and we felt it was clear that it was marketing itself to unsophisticated rather than wholesale customers.”
The mislabelling of products is something ASIC has identified as a major issue and included in their most recent corporate plan. “It’s a priority for us,” says Bollen, who will speak on a session called How to pick a fraud at the Professional Planner Researcher Forum Digital on December 2 with UNSW’s Pamela Hanrahan and consultant Dominic McCormick.
A common mislabelling problem relates to speculative investments advertised as offering fixed income-like return security. Less than a week ago, for example, ASIC placed a ‘stop order’ on Skyring Funds Management after it found the firm’s radio advertisements were “misleading or deceptive” because they suggested investments in one fund had “the same or a similar level of risk” as bank-issued products.
“This comparison is inaccurate because the fund carries significantly higher financial risk than bank-issued deposit products,” ASIC continued.
Aside from fraudulent and mislabelled products, ASIC is focussing on what it can do to ensure the financial services product market is fair and competitive. The regulator is averse, though, to being unduly intrusive.
“I don’t think people want ASIC to be the arbiter of which products are the winners and losers, you want us to deal with fraud and misconduct and you want the playing field to be competitive,” Bollen says. “We’re trying to see if there’s anything we can do that will help that.”
Some financial products on the market aren’t fraudulent but are poor quality. Yet it’s not ASIC’s role to weed these out, Bollen explains.
“It’s a pretty open design system, we don’t have a merit review process of which products are appropriate to be sold and which aren’t,” he says.
In a well-oiled market, competition should do the job organically.
“You want healthy competition and the products that aren’t delivering to fall by the wayside. While competition by itself can’t solve everything, people are more likely to end up with what they need if there are the right measures in place to promote a competitive landscape.”