SAFAA CEO Judith Fox

The peak body representing stockbrokers has resisted calls for the 20-year old wholesale investor rules to be updated, calling the issue a “solution without a problem” that overlooks “more pressing and practical” problems plaguing the advice sector.

In a discussion paper released Monday, the Stockbrokers and Financial Advisers Association (SAFAA) addressed repeated calls from industry, representative groups and academics for the wholesale investor benchmarks to be updated to either reflect current income and asset levels or to include a financial literacy component.

Even the corporate regulator has railed against the “outdated” rules.

While many of the calls for change referenced Mayfair 101 as an example of a company that seemingly took advantage of the rules to peddle products designed for wholesale investors to the mass market, SAFAA put forward that the company’s conduct was isolated and doesn’t justify the cost and disruption of updating the definitions.

“Mayfair 101 does indeed represent misconduct, but it does not represent the experience of the vast majority of wholesale clients in Australia,” SAFAA stated.

Currently, anyone earning $250,000 for two years or holding $2,500,000 in net assets could be classified as a wholesale investor and accept securities offers without receiving a product disclosure statement or other basic protections afforded to retail investors.

When the wholesale investor rules were enshrined in the Corporations Act over two decades ago, however, they were left unindexed; only 1.9 per cent of the population (or 104,000 households) met one of those benchmarks in 2002, yet a reported 16 per cent (1.09 million households) now do so.

While proponents of change have argued that the benchmarks need to be raised, others have gone further and pushed for a financial literacy test, pointing out that wealth is not a proxy for knowledge.

Significant impacts

According to SAFAA, the impact of changing the wholesale (or ‘sophisticated’ investor) rules would have “significant impact” on investors who “have not been consulted on their views”.

“Given that significant additional disruption and costs would be introduced into the system for both clients and licensees when to date no major benefits have been articulated, the rationale for changing the test is not clear…”

Its own stockbroker and adviser members would also adversely be affected, SAFAA argues, with businesses that were built on one model being forced to adapt to another.

“These impacts would not be uniform across the financial services industry, with some businesses and clients being much more affected than others.”

The association said arguments for change to the rules do not take into account existing protections that remain under general law and in the Corporations Act for wholesale investors, who still have access to forms of advice. “The provision of wholesale advice is not a regulatory free-for-all,” the report stated.

As for education, the paper states, investors are much smarter now than in the past because of access to “newsletters, chat rooms and investor forums”.

“There has also been an increase of financial education and advice content on social media apps…” the group argued.


One comment on “‘Solution looking for a problem’: SAFAA rejects fixing wholesale investor rules”
  1. Avatar

    Terrific paper produced by SAFAA. There is no truer statement than this is “a solution looking for a problem”. As the Paper points out the Test is not the problem but there are some useful improvements that could be made in other areas. The FASEA deal demands that Advisers demonstrate Professional Judgement, perhaps empowers is a better term, and therefore, the adviser, with the client in front of them, should be the ones that are in the best position to make calls on financial literacy. For the Mayfair 101 style, direct issue product placement deals, the rules need revamping. Wholesale advice seems to indicate there is advice included?
    As for the Councils investment in CDOs, seriously, if that has any truck in terms of an impetus for change, we may as well reconcile ourselves to the proposition that “there is a desire to remove all decision-making responsibility from investors”.

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