Wholesale client tests – what’s the latest news?
There has been much talk among stakeholders in the investment funds industry about the potential revisions of the wholesale client tests as part of Treasury’s Review of the regulatory framework for managed investment schemes. It is still unclear what (if any) changes will be made to the tests, and when.
What you need to know
- It is unclear what (if any) changes will be made to the wholesale client tests as part of Treasury’s Review of the regulatory framework for managed investment schemes.
- The potential for the wholesale client thresholds to be increased is a matter for concern not just for wholesale fund managers, but also retail fund managers who issue wholesale-only products.
- When Treasury provides its report to the Government, we may have some insight as to where things may go. Hopefully the report will be made available by the end of March 2024.
- Ultimately, we do not expect much will change as to the way wholesale clients are defined in the Corporations Act at least (if ever) for another 12 to 18 months.
The story so far
The review of the regulatory framework was announced in the October 2022-2023 Budget, and a consultation paper was released by Treasury in August 2023. Submissions closed on 29 September 2023. You can find the views of a range of stakeholders as to what (if anything) should happen to the wholesale client tests in 69 of the 80 submissions received by Treasury (11 were confidential) on Treasury’s website.
What changes are in the wind?
A revision of the wholesale client tests increasing the net assets test to $4.5 million (from $2.5 million) and the gross income test to $450,000 (from $250,000) is in the wind. These figures are consistent with ASIC’s submission to Treasury, which contemplates an increase to the tests to reflect inflation. Importantly, this is the view of ASIC, a body independent of the Government, and cannot be taken to reflect the view of the Government.
Whether this is what Government is thinking is yet to be confirmed. Until the Government receives Treasury’s report, it cannot (hopefully) be said with any certainty what changes, if any, will be made to the thresholds. In this vein, it is noted the Minister for Financial Services, Stephen Jones, posted a video on LinkedIn in early February where he stated the Government has not received recommendations from Treasury and has not made any decisions on the matter.
Based on discussions held with Treasury, we are hopeful Treasury will provide the Government with its findings by the end of March. Once the report is published, we will have some insight as to where things may go.
What is the general consensus?
Having considered the submissions made to Treasury and having had discussions with various stakeholders in the investment funds industry, the general consensus seems to be the thresholds for the wholesale client tests should be made ‘harder’ to satisfy – either by increasing the thresholds or excluding the family home from the net assets test.
If the thresholds for someone to qualify as a wholesale client were to increase materially, then the likely consequence would be a reduction in the number of wholesale products available for investment by Australians – and potentially (but not necessarily) an increase in the number of retail products.
Wholesale fund managers would generally experience a reduction in the depth of their investor base if the tests were materially revised. In response, some wholesale fund managers may decide to move into the retail space to increase the distribution of their products – either by obtaining authorisation to operate registered schemes as a responsible entity, or by utilising the services of professional responsible entities who can assist wholesale providers (and unlicensed businesses) in making an investment product available to retail clients. Making an investment product available for retail investment is generally much more costly than an equivalent wholesale product, so it may be Australians have fewer investment products to choose from as a result of any changes to the tests.
How will a revision impact your business?
The potential for the wholesale client thresholds to be increased is a matter for concern not just for wholesale fund managers, but also retail fund managers who issue wholesale-only products. If you would like to understand the impact a revision of the tests may have on your business, then please get in touch with a member of the HW Funds Team.
What will happen next?
Before any difficult-to-reverse (or costly-to-reverse) decisions are made by fund managers in anticipation of what may happen to the tests, it is important to consider the time it may take for changes (if any) to take effect.
There are several steps that need to occur before any changes to the tests take legislative effect. First, Treasury needs to provide its report to the Government, and then it is a matter for the Government to consider the report and make any decisions. This would ordinarily involve a Cabinet decision-making process.
The next steps depend on the extent to which the tests are to be changed. Changes to most of the monetary values could be implemented by changing the regulations only, which is simpler and could be made faster than amending the Corporations Act. However, changes to the Corporations Act itself may be required depending on the scope of the changes (including whether the product value test in the context of the corporate capital raising provisions were to be changed).
Assuming changes would need to be made to the Corporations Act to effect changes to the framework, a Bill would need to be drafted and public consultation would need to take place, which may result in revision to the Bill. The Bill will then be introduced to Parliament, where it would be subject to an established path potentially culminating in royal assent being given (assuming it is passed by both houses). This process, if it were to commence, may extend until after the next federal election, which will be held on or before 27 September 2025.
Also, the passing of any legislation may be more or less likely depending on the party that wins the election (and the spread of members across the parties in the two houses at that time).
Ultimately, we do not expect much will change as to the way wholesale clients are defined in the Corporations Act at least (if ever) for another 12 to 18 months.
Don’t hold your breath!
This article was written with the assistance of Jordan Beveridge, Law Graduate.
