The Financial Services Council has argued for updating the wholesale investor test but believes the current regime should be grandfathered to mitigate any potential negative effects for existing clients and investors.
In a submission to the consultation on the Parliamentary Joint Committee inquiry into wholesale investor and wholesale client tests, the FSC argued there is a “good case” to update the test given that when it was introduced in 2002 it covered 1 per cent of households and now covers 12 per cent.
“If left unchanged, it would cover a fifth of Australian households by 2033 and a quarter of Australian households by 2043,” the FSC submission said.
The FSC argued its recommendation strikes the right balance by taking the effect on consumer protection and capital markets into consideration together.
The council also supports an increase in the net assets threshold from at least $2.5 million to at least $5 million including the family home, which would bring the proportion of households classified as wholesale investors under the net assets test to approximately 3 per cent.
Alternatively, the assets test threshold could remain at least $2.5 million but exclude the net value of the principal place of residence which would bring the proportion of households classified as wholesale investors under the net assets test down to approximately 5 per cent.
The FSC said any changes to the test would need permanent grandfathering of current investors to prevent any situations where investors are forced to make redemptions or are unable to make additional investments in the same product and asked for a two-year transition period – which would also prevent advised clients from being orphaned, a key concern of both the Financial Advice Association and Stockbrokers and Investment Advisers Association.
“If grandfathering is temporary, for example for two years after the test change with a subsequent application of the test, this will not address the issues created for investors currently classified as wholesale investors who may lose this status if new test thresholds are introduced,” the FSC said.
The minister conceded last week in a post-budget discussion with the FSC that changes to the test were a low priority for the government. They were included as part of the Managed Investment Scheme review, which was introduced after the newly-elected Labor government backed away from including managed investment schemes in the Compensation Scheme of Last Resort.
The FSC said the income test should remain at the current level of $250,000 given it only covers 1 per cent of the population, along with keeping the product value test of at least $500,000.
“In 2022, 7.9 per cent of households had access to more than $500,000 in liquid assets, and therefore the ability to meet the product value test, up from around 2.7 per cent in 2002,” the submission said.
“However, we consider it unlikely that an individual would invest $500,000 into a single wholesale investment or several products at a single point in time if they were not already a high net worth individual.”
Additionally, the council said it doesn’t support periodic indexation of the thresholds given the “uncertainty” it would create for the industry.
“We would be open to a legislative mechanism for periodic consideration of increases to the thresholds (for example, every five years) as part of a statutory review of the appropriateness of the thresholds undertaken by the minister,” the FSC said.
The FSC also did not back the introduction of consent requirements for wholesale investors, because the consent requirements in the Quality of Advice Review relating to advised clients would create further red tape.
The council noted that wealth and income are not “perfect proxies” for financial literacy and sophistication and that people who might come into wealth through inheritance or high asset value inflation might not be financially sophisticated.
“Having high dollar amounts that cover an appropriate proportion of the population recognises that generally products that have lower liquidity and carry higher risk are more appropriate for investors who have the financial resources to better bear that risk,” the submission said.
