With an abundance of regulatory reform happening in financial advice, the Stockbrokers and Investment Advisers Association has argued against making changes to the wholesale investor test. 

In a speech to the Parliamentary Joint Committee on Corporations and Financial Services earlier this month, the association’s CEO Judith Fox said there was already too much reform happening, with Tranche 2 of the Delivering Better Financial Outcomes draft legislation due imminently, along with changes to education standards to support new entrants to the profession. 

“Until we have fixed the process of providing advice to retail clients and created a pathway for more new entrants to the profession, making a fundamental change to the wholesale client tests that may result in wholesale clients being re-categorised as retail will have a substantial impact on them,” Fox said. 

The inquiry, launched in March, is separate to the Managed Investment Scheme review underway with Treasury, which includes the wholesale investor and client test in its scope. 

SIAA – along with the Financial Advice Association – have both strongly warned about the impact lifting the threshold might have, as wholesale-only advisers would have to ditch clients to stay compliant. 

The Financial Services Council supported lifting the wholesale investor threshold from $2.5 million to $5 million (including the family home), but with the caveat that existing investors be grandfathered so they can remain in the existing regime. 

Fox said the current regulatory framework has made it too cumbersome for retail clients to receive financial advice – noting the number of financial advisers who have departed the industry since the Hayne royal commission due to regulatory imposts and a transition towards higher professional standards. 

“Indeed, many retail clients have been orphaned over the past few years, given the lack of financial advisers,” Fox said. 

“Therefore, clients who are re-categorised from wholesale to retail will find it very challenging to find a retail client adviser who can give them the advice they want. They would also become orphaned clients, vulnerable to social media as their source of advice.” 

The test, which defines a wholesale investor as having net assets of $2.5 million or gross income of $250,000 per year in the last two years, has been unchanged since it was introduced in 2001. 

Despite the fact the threshold for the test has not changed, Fox argued that over that time Australians have become wealthier and have higher levels of financial knowledge. 

“We hear arguments that the test applied to 2 per cent of the population when it was introduced and now 16 per cent meet the criteria and therefore the tests now apply to too many Australians,” Fox said. 

“The current net worth of Australian households is 380 per cent higher than in 1989, despite the adult population, at 12.25 million, only being 70.5 per cent higher. It is appropriate that the test apply to more Australians.” 

The distinction between being a retail and wholesale investor means the latter forgo consumer protections such as external despite resolution processes including AFCA, as well as potential access to the Compensation Scheme of Last Resort.  

Fox also described Design and Distribution Obligations, which officially commenced in October 2021, as a “game changer” since product manufacturers now must clearly identify the market their products are designed for and may be distributed to. 

“Furthermore, the DDO regime has been a game changer in the regulation of financial products, with the obligation that each product must have a Target Market Determination that is fit for purpose,” Fox said. 

 

“ASIC has been very active in surveillance and enforcement. Any change to the thresholds that move investors from the wholesale to the retail category could result in a very poor outcome for those clients.” 

Join the discussion