The aftermath of a parliamentary review into the wholesale investor test has left an underwhelming resolution to a long-standing issue.
The Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry in March 2024 into the wholesale investor test for offers of securities and the wholesale client test for financial products and services.
The review, which was separate to the MIS review commissioned by the government, was chaired by Labor Senator Deborah O’Neill and made only two recommendations when it released its final report last week.
The first was that the government consider establishing a mechanism to hold period reviews of the operations of the test.
The second recommendation was that “subject to stakeholder consultation” amend the Corporations Act to remove “subjective elements” of the sophisticated investor test to introduce objective criteria relating to the knowledge and experience of the investor.
Assured Support managing director Sean Graham tells Professional Planner it was hard for the government to argue for a significant change in an election year.
“The outcome was very conservative, it was let’s do nothing, let’s commit to doing something in the future,” Graham says.
“That seems to me as a way of getting this off the agenda so that [they] don’t have either the pushback or the scare mongering that they had with dividend franking a couple of years ago.
“The election did play into it, I think they’re trying to get rid of as many of these potential impediments as they can.”
Graham says he suspects there is more work to be done around this subject following the election and appointment of a new Minister for Financial Services and hopeful the next government will return to the issue.
Following Minister Stephen Jones’ announcement that he is stepping down from politics, his replacement will have the option to return to this issue should Labor win the election.
Pamela Hanrahan, Professor of Commercial Law and Regulation at UNSW and a former senior executive leader at ASIC, says it is unfair to leave this work to the PJC or ad hoc reviews and instead an independent expert government body should be formed to tackle the issue presented in the inquiry.
“This process shows why we need a standing independent expert body, like the former Corporations and Markets Advisory Committee,” Hanrahan says.
She adds the report is “disappointing” because it does not properly engage with policy reasons as to why the thresholds should sit where they do.
“It would have been better to go deeper and really think about the circumstances in which an individual investor or client really benefits from the protections put in place by the retail client laws, and when they don’t need them as much,” Hanrahan says.
Skipping steps
The increased proportion of the Australian population that can qualify as wholesale investors and clients due to the financial thresholds means more advisers are able to forego compliance requirements and take advantage of unsuspecting wealthy clients.
The individual wealth and product value tests have remained at $2.5 million for the assets test, $250,000 per year for the last two financial years for the income test and $500,000 plus for the product value test threshold.
This was a key element of the report and part of ASIC’s submission in support of raising the financial thresholds.
“Pretty minor, isn’t it, to classify someone as a wholesale [if] they’ve got assets of two and a half million, or they’ve got income of 250,000,” Graham says.
“That means that they’re wholesale and they don’t need consumer protections. I don’t think that’s right.”
The risk lies when wholesale clients who need the consumer protections that retail clients get such as the Australian Financial Complaints Authority and the Compensation Scheme of Last Resort.
“Just because someone’s got a bit of money, doesn’t mean they actually can do without those protections and that’s where the real risk is,” Graham says.
Hanrahan says it could be a worry that the PJC did not accept the argument that clients in the retail market are better protected than those in the wholesale space.
“That might say more about whether the retail protections, which come at an enormous cost, are actually fit for purpose.”
Advisers can view the increasing number of wholesale clients as an opportunity to avoid their compliance obligations by offering wholesale advice only to avoid retail advice obligations.
Although financial advice requires consent, Graham says the clients consent to the advice “on the basis of trust. It doesn’t mean that they necessarily understand what’s going on”.
“It can really conceal a lot of misconduct for bad parties.”
Graham says the committee should have implemented ASIC’s proposals to change the wholesale definition and provided clarity around what a “sophisticated investor” is.
“It would have given that flexibility to the market to enable the stock brokers to be able to legitimately treat sophisticated, competent traders and whatever else, as sophisticated investors, and give them the advantage of the wholesale market without exposing rich but vulnerable people to the abuse.”
Home is where the money is
The intergenerational wealth transfer will include the passing down of property as well as money to a younger generation – an influx of wholesale clients with little idea what financial advice should look like.
The house as an asset was part of the Parliamentary report as for many wholesale clients, their wealth is mostly within the home.
“The risk with the wholesale definition and the classification being so low is there a lot of people who, if they own property house in Sydney [for example], are going to be wholesale clients,” Graham says.
In submissions to the PJC report, the Financial Advice Association Australia recommended maintaining the current assets test threshold of $500,000 but excluding of the family home from the assets pool to reduce the number of wholesale investors and wholesale clients.
However, this was met with opposition from associations who raised concerns removing the family home from the assets pool would be disadvantageous to people who live in different areas or cities.
“People are going to be incentivized to try to exploit the flexibility of the wholesale clients’ household definition provides to them,” Graham says.
“I don’t think that’s good for anyone.”
