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Industry body warns of overreach in sophisticated investor test changes

By Rhea Nath
6 minute read

The Property Funds Association of Australia has warned numerous unlisted fund managers could be significantly impacted by current proposals to amend the thresholds of the test.

According to the peak body representing the unlisted property funds industry in Australia, changes to the sophisticated investor test could adversely impact fund managers and their investors.

Under the current law in the Corporations Act 2001, there are a number of eligibility tests to classify sophisticated investors or wholesale investors, which include having $2.5 million in net assets, including the family home or earning more than $250,000 gross income in two years.

The Property Funds Association of Australia (PFA) has argued for minimal changes to the thresholds for managed investment schemes, which is currently being reviewed by the government.


Paul Healy, chief executive of the industry body, highlighted that the recommendation to increase the threshold would be out of step with other countries and severely impact the wholesale fund industry.

“We do not believe that isolated collapses, mostly in the retail market, justify any major changes to the test and will only prejudice investors and their access to more products at a lower cost,” Mr Healy said.

The PFA has argued the wholesale/retail investor split is currently balanced, with some 84 per cent of Australians unable to qualify as wholesale investors.

“There is an argument that the current thresholds set in 2002 were too high, and that the current level of wholesale investors is by no means excessive,” Mr Healy explained.

“A healthy wholesale funds industry is an important part of the wealth management ecosystem and plays a particularly vital role in unlisted property.

“Wholesale unlisted property funds contribute strongly to property development, innovation, and economic activity.”

Many unlisted fund managers will face significant impact to their businesses and investors if the existing thresholds are substantially increased, he warned, adding that several unlisted property fund members of the PFA have expressed concerns regarding sudden and excessive changes to the thresholds.

“This change would have a disproportionate impact on unlisted property as most funds are only offered to wholesale investors,” Mr Healy added.

According to the PFA, if changes are made, there must be grandfathering.

“Substantially increasing the net asset threshold without grandfathering has potential to be extremely damaging to unlisted property investors and funds,” Mr Healy said.

“Grandfathering is essential for unlisted property investment schemes so that existing investors retain their wholesale qualification throughout the life of the investment.”

Looking at how the test operates in other jurisdictions, Treasury’s review noted the accredited investors test in the US includes a net worth requirement of at least US$1 million, excluding primary residency and income of at least $200,000 or joint income of $300,000 with a spouse or partner in the prior two years.

Meanwhile, in the United Kingdom, the test identifies two types of professional clients, namely per se professional clients including institutional investors, insurance companies, and regulated financial institutions, among others; and elective professional clients which includes individuals who request and receive a statement acknowledging they have been assessed by a firm as having the expertise, experience, and knowledge to be capable of making their own investment decisions and understand the risks.

The PFA said that, given one of the primary arguments for increasing the threshold has been consumer protection, there remains “no evidence” Australian investors are running into trouble with wholesale funds.

The industry body pointed out that the most high-profile collapses referred to in Treasury Consultation Paper were retail AFS schemes.

In contrast, the majority of unlisted property funds are easy to understand and fairly simple, Mr Healy said.

“Investment in direct property forms part of an investor’s broad portfolio of investments, including both liquid and illiquid investments. Many unlisted property funds invest for a long term of five to 10 years in property assets which are illiquid, targeting a combination of income returns and capital growth over a certain time period,” he explained.

“These funds are easy to understand and subject to a wide range of existing protections including strong accounting standards. Restricting these investment opportunities for no clear reason seems nonsensical.”

Previously, research undertaken by PwC and Data Analysis Australia, on behalf of the Financial Services Council (FSC), projected that almost 20 per cent of Australian households would be eligible to buy wholesale products without retail consumer protections in less than a decade.

According to the FSC, this would leave Australian investors potentially vulnerable due to not properly understanding the associated financial risks.

In order to reduce the number of households that would meet the threshold, the FSC proposed a $5 million net asset threshold for the wholesale investor test. This would bring the number of Australian households eligible back down to 3.1 per cent, it said.

“The increase in property prices in the past two decades since the threshold was implemented has contributed to more Australians being classified as wholesale investors because of the increase in value of the family home,” said FSC chief executive Blake Briggs.

When the thresholds were first introduced in 2001, only 1.5 per cent of households were captured under the current $2.5 million asset threshold and now stands at some 11.7 per cent, he noted.

“If the threshold is left unchanged, these trends are set to continue, so that by 2033, more than one in five mum and dad investors could cease to have access to the consumer protections that are inherent when you are defined as a ‘retail investor’, and instead be treated as a sophisticated, ‘wholesale investor’ regardless of whether they understand the more complex financial products they can be offered,” Mr Briggs said.