There is a clear and pressing need to update or radically alter the current definitions of retail and wholesale clients according to Pamela Hanrahan, a professor of commercial law and regulation at UNSW who advised at the Hayne royal commission.
As per the Corporations Act, the current definitions allow investors with over $500,000 to invest, consecutive years income of $250,000 or net assets (sans the family home) of $2,500,000 to be classified as wholesale or ‘sophisticated’ investors, meaning they can accept advice without a PDS or other basic protections afforded to retail investors.
The structure of the definitions makes it easier for wholesale advice firms to provide advice to reasonably affluent clients under looser regulatory restraints, but opens up a wide slab of cashed-up investors to financial harm and predatory behaviour.
Hanrahan has long been an advocate of reform, telling Professional Planner in 2019 that as time has gone by, the benchmarks “become less of a proxy for knowledge“.
“That $500,000 threshold between retail and wholesale clients has been in the securities laws since 1994 and never changed,” Hanrahan said at the Professional Planner Licensee Summit in Katoomba on Tuesday.
Twenty-five years later, she said, the problem is now urgent. Despite years of lobbying, the government still appears to have reform on the backburner.
“I think I first wrote to the government suggesting that maybe they can index that to inflation in about 2005.”
Hanrahan said she doesn’t even like the term ‘retail’ client, instead preferring to call non-HNW clients “household” clients.
“If it’s a household client they should get protections,” she said, adding that the protections afforded these clients should be maintained up to a level of $10 million in net assets.
There is hope for the cause. The Australian Law Reform Commission is deep into a review into reducing complexity in financial services regulation, with a focus on the Corporations Act, and a final report scheduled to drop in 2023. The first interim report, due in November this year, will target definitions.
Financial advice will take a prominent role in the review, and ALRC special counsel Andrew Godwin acknowledged Chapter 7 of the Act is generally recognised as “not an easy piece of legislation” with “lines of demarcation sometimes difficult to identify”.
Speaking on Monday at the Licensee Summit, ALRC President Hon. Justice Sarah Derrington said the industry needs to assess how it wants to be regulated.
The answer to Derrington’s question, as it relates to client definitions, will depend on whether a retail or wholesale adviser is answering it.
Hanrahan acknowledged as much, saying her campaign to update the definitions could make her unpopular.
As it stands, however, Hanrahan believes too many clients are at the mercy of firms like Mayfair 101, whom the corporate regulator has sought injunctions against for what they called “misleading and deceptive” conduct.
While the lawyer and academic was a close adviser to Hayne at the royal commission, no recommendation was made regarding updating client definitions. He did, however, schedule a review of measures to improve the quality of advice for next year, which will be undertaken by Treasury.
According to Hanrahan, the need for updated definitions is dire and needs to be picked up by advisers as well as policymakers.
“Work out what it is you think needs to be regulated,’ Hanrahan told the assembled licensee heads and delegates in the Blue Mountains.
“Think about whether all households should get the protections, whatever they end up being, rather than that artificial dividing line between retail and wholesale that we have at the moment.”