A peak financial advice body has proposed raising the threshold for classifying investors who specialise in more risky investments to protect them from harm due to misclassification.
At a recent parliamentary inquiry hearing, Philip Anderson, a general manager at the Financial Advice Association of Australia (FAAA), raised the issue that the current “wholesale investor” regime was outdated and needed to be reformed to catch up with the development of the market.
Wholesale investors are generally those with more experience, knowledge, and capital than normal (retail) investors.
To be classified as a wholesale investor, one needs to pass one of several tests, including making an investment of at least $500,000 (US$337,000) in an investment fund, having a gross income of at least $250,000 for each of the last two financial years, having an Australian Financial License, or having a net asset of at least $2.5 million.
Wholesale investors are subject to higher risk but fewer compliance requirements from the Australian Securities and Investments Commission due to the nature of their investments.
Proposal to Raise Threshold of Wholesale Investors
Anderson called for a higher barrier of entry for wholesale investors as he believed the current threshold was not sufficient to protect vulnerable investors who were misclassified.
“This must start with modernising the wholesale client thresholds to reflect today’s economic realities,” he told the Joint Committee on Corporations and Financial Services.
“Without these updates, an increasing number of consumers who lack the required experience, financial sophistication and capacity to sustain loss could be misclassified as wholesale clients forfeiting essential protections.”
Under the FAAA’s proposal, Anderson said there should be law changes to increase the threshold for the asset and income tests of wholesale investors, and implement an indexation of these thresholds.
He also suggested introducing a financial literacy or capability test, as well as a clear statutory warning and an informed consent process before investors could be treated as wholesale.
“Our recommendations aim to enhance consumer protection while maintaining the flexibility that genuine wholesale clients require,” he said.
“We can create a more equitable framework that protects those consumers who are potentially more vulnerable without removing access to high-quality growth opportunities for appropriate clients.”
Anderson’s remarks came as there has been a significant increase in wealth accumulated by Australian households in the past 20 years, which derives from the growth in property values.
Concerns About FAAA’s Recommendations
A member of the Committee raised concerns that the FAAA’s proposal of raising the threshold for wholesale investors could push start-ups seeking to raise capital to move offshore.In response, Anderson said there was a question of balancing competing priorities.
“We certainly don’t want to get in the way of the capacity of start-ups being able to raise funds,” he said.
“But we are concerned about investors put into investment products as wholesale clients, where they simply don’t have the skills and capability to make those investments.”
While the FAAA manager acknowledged it was difficult to come up with a solution, he stressed that there was a need for the government to have the capability of assessing whether someone is suitable to be treated as a wholesale investor.
Meanwhile, another Committee member questioned Anderson about the loss of opportunities for existing wholesale investors if they failed the proposed higher thresholds.
The general manager responded that the peak body advised against forcefully removing wholesale investors from their investments in its proposed transition plan.
“We think that those people who have gone down the path and are currently being treated as wholesale and are comfortable with that … they shouldn’t be forced to be moved with respect to their existing investments,” he said.
