No change to wholesale client test thresholds
Following almost 12 months of uncertainty, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) has released its report into the wholesale investor test for offers of securities and the wholesale client test for financial products and services (Tests) under the Corporations Act 2001 (Cth) (Act). The Tests play an important role in ensuring only people with the appropriate level of resources, knowledge and skill can invest in wholesale markets in Australia. For more information on the scope of the Committee’s inquiry into the Tests, read our article, New parliamentary inquiry into the wholesale investor and wholesale client tests.
In their report, the Committee did not endorse submissions to increase the financial thresholds in these tests and instead recommended the implementation of a mechanism of review.
Wholesale investor and client thresholds
The Committee received a substantial number of submissions. The key focus of these submissions was around whether the financial thresholds in the tests should be increased (current level is $250,000 income or $2.5 million in net assets).
Several submissions, including ASIC’s, lobbied for an increase in the financial thresholds, arguing it was necessary to account for the growth in the general value of assets and incomes of Australians over time. They noted that significantly more Australians can qualify as wholesale investors or clients today compared to when the Tests were first introduced.
The Committee was not persuaded by these submissions, noting that while inflation may have increased the potential pool of wholesale investors and clients over time, there was no evidence to suggest there had been a resultant increase in systemic harm or in the number of wholesale investors that were vulnerable and unqualified to participate in wholesale markets.
The Committee also noted that raising the thresholds would increase the risk to investors by reducing their ability to diversify investments and would be disruptive to established funds and investors, to the extent current wholesale investors and clients were reclassified as retail.
However, the Committee noted that while a case for raising the thresholds has not been established at this time, the inquiry has demonstrated a mechanism is needed for periodically reviewing the operation of the Tests.
Sophisticated investor test
The Committee also highlighted that during the inquiry participants raised concerns about the subjectivity of the sophisticated investor test. It was noted that the subjective character of the test increases the potential for conflicts of interest and, as noted by ASIC, could be abused by AFS licensees, particularly in relation to complex and novel product offerings.
What’s next?
The Committee recommended that government:
- consider establishing a mechanism for periodic review; and
- should (subject to a period of stakeholder consultation) remove the subjective elements of the sophisticated investor test and introduce objective criteria relating to the knowledge and experience of the investor.
This outcome will be welcomed by many sectors of the investment funds industry. However, the Tests still form part of the review initiated by Treasury in August 2023 about the regulatory framework for managed investment schemes. One part of that review focused on the tests used to determine if an investor is a ‘wholesale client’, specifically looking at the financial thresholds and individual wealth test. Learn more in our article, Managed investment scheme consultation paper poses critical questions.
The HW Funds team is monitoring these developments and will keep you up to date.
This article was prepared with the assistance of Law Graduate Roger Miyumo.
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