Research released by the Financial Services Council has found that in less than a decade, almost a fifth of Australian households would be eligible to buy wholesale products without retail consumer protections, leaving them potentially vulnerable due to not properly understanding the associated financial risks.

In a media release, the FSC said research undertaken in conjunction with PwC and Data Analysis Australia showed the council’s proposed value for the wholesale investor test net asset threshold of $5 million, including the family home, would bring the threshold up to date with changing asset profiles and bring the number of Australian households eligible back down to 3.1 per cent.

The wholesale investor test threshold had been included into the review of managed investments schemes, being conducted by Treasury.

The FSC also noted that wholesale investors lose retail consumer protections like the Design and Distribution Obligations, which obliges financial product issuers to take reasonable steps to ensure distribution is consistent with the target market, bans on conflicted remuneration, dispute resolution processes and access to a compensation scheme of last resort in certain circumstances.

The FSC proposed:

  • Increasing the net asset test from $2.5 million to $5 million, including the family home;
  • Ensuring the sophisticated investor limb is easier to use by making it less subjective; and
  • Grandfathering changes to avoid the re-classification of existing investors, which could force redemptions that are not in consumers financial interests.

The PwC report also found:

  • By 2043, 25.5 per cent of Australian households would be captured under the net asset threshold, if the current threshold is left unchanged;
  • If the original net asset threshold were indexed by CPI, it would now be $4.3 million, which would mean 5.2 per cent of households meet the threshold;
  • The current $250,000 gross income test threshold, which captured less than 1 per cent of individuals in 2002, when the test first applied, still covers less than 1 per cent of individuals. Therefore, the FSC recommends no change;
  • 7 per cent of households in 2002, had enough access to liquid assets to meet the product value test of $500,000. Now, 7.8 per cent of households have access to over $500,000 of liquid assets to meet the test. The FSC recommends no change given it is unlikely that individuals will invest $500,000 in a single investment; and
  • Employing an options analysis which assessed the relative impact of the proposed options for changes the wholesale investor test against categories of benefits (consumer protection) and costs (costs of implementation, impact on access to higher risk-adjusted returns and impacts on the ability to raise capital), PwC found the FSC’s proposals rated higher than indexing for inflation and automatic periodic re-assessments of the thresholds by the minister.