ASIC's Rhys Bollen at the 2019 Professional Planner Researcher Forum

Increasingly outdated investor definitions are encouraging more dodgy product providers to approach cashed up investors and forcing ASIC to take more action than they normally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 “In that time average income has doubled and house prices have more than doubled so it is out of date.”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 [101] 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.

Product Darwinism

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.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
2 comments on “Outdated sophisticated investor rules increase ASIC’s load”
  1. Avatar James Mawhinney

    Thank you Tahn for calling out the regulator on why they have come after Mayfair 101. It’s plain as day that they don’t like their own laws, and would rather pick a scapegoat for change. It’s a completely unsophisticated approach to law reform and policing the industry. Our investors have been the roadkill on ASIC’s warpath to change the laws by picking us as a high profile case. Taxpayers should be infuriated at the millions they have no doubt spent to target our group, and all they have done is place at risk millions of dollars of hard-earned money from self-funded retirees. These people cannot afford to lose their money. If ASIC had written to us, just like they did many other investment managers, and asked us to change our ads, we would have done so. If you haven’t already, have a read of my LinkedIn post on this – https://www.linkedin.com/feed/update/urn:li:activity:6737494269801713664/

    In terms of wholesale investor laws, I have two constructive suggestions:

    1. Change the word “sophisticated” to “qualified”. The word “sophisticated” has a literal meaning, which too many people are caught up on. All our investors in Mayfair Platinum and IPO Wealth were “qualified” investors. We have been punished by ASIC for the literal meaning of the word, not the legal meaning. Simply changing this alone will change much of the industry commentary on the subject.

    2. I am an advocate for the $500k threshold dropping to say $50-100k. Why? Because investors otherwise will try and round up $500k to invest, when for many it is their life savings or close to it. By reducing the amount, investors will be encouraged to diversify more. If someone loses $50k and it’s their life savings, well they need to get back out to work, or better they invest in a retail product. Otherwise, the rich will continue to get richer, and our population will be starved of opportunities to a) get ahead, and b) experience the ups and downs of investing. We are otherwise breeding a society full of unsophisticated, experience-less, investors. A lower entry point will help our society develop better investing skills and losses will be less catastrophic for those that only just scrape in to the $500k threshold currently.

  2. Avatar Steve Christie

    One idea I think has legs that is certainly worth debating (noting there must be exemptions to ensure valid (not LIC and ETF) capital raisings for companies do not get stuffed up):

    • No $500k product exemptions (as anyone can sell a home and be hounded to put some of the proceeds in an investment)
    • All people who give financial advice to any SMSF, super fund member, private individual, private company (non-AFSL holder, non APRA regulated, non listed etc) or registered charity must meet the FASEA educational, CPD and Code of Ethics requirements. From my experience with charities they also need protection and it is scandalous they are not treated as retail. Their boards often are quite unsophisticated and get sold bad product (think back to the CDO crisis and the GFC)
    • BUT the Government could introduce new legislation/a simple section could be along the lines that if those FASEA bound advisers can confirm that the client they are dealing with and advise is sophisticated in the true sense (not just rich/windfall/high income), those clients can opt out of SOA’s, FSG’s, OSA, FDS etc etc and can invest in “wholesale only” products. Noting of course that the adviser will still be bound by the FASEA code, know your product, ensure the client understands etc – that is for the benefit of the whole sector, the reputation of the industry and confidence in the system.

    This also will expand the number of advisers who can do pro bono work, expand the number of people capable of giving financial advice to “normal” Australians. This is actually not in my interests as it slows the rapid fall in the number of my competitors….but it is the right thing to do.

    If we don’t do this there will be more scandals (ie rich widows, naïve high income professional etc), and the industry will suffer.

    That some businesses may need extra time to adapt? Fine, do (a) immediately and give time for the definitions to change to allow “wholesale only” business to adapt to (b). Also perhaps retain the idea of a professional investor but with a much higher limit (which would thus also allow very large charities to engage direct with the insto market if they felt capable) would knock the legs out of any argument that it is unreasonable to do this for true professional investors.

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