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Sophisticated investor test under scrutiny amid a new inquiry

By Keith Ford
3 minute read

A parliamentary committee has kicked off an inquiry into the wholesale investor thresholds.

The parliamentary joint committee on corporations and financial services has opened an inquiry into the wholesale investor and wholesale client tests.

According to the terms of reference for the inquiry, it will review the current wholesale investor and client tests, including the “legal requirements, identification of all contexts in which the tests are relevant, the consequences of an investor/client meeting the relevant test, and the application of the tests in practice”.

It also said it would examine the historical development of the tests in Australia, consider previous reviews and inquiries, and look at comparable overseas jurisdictions, including any proposed or recent changes to tests used in similar contexts.

The committee has called for written submissions, with any stakeholders having until 15 May 2024 to make a submission.

Originally announced as part of the 2022 federal budget, Treasury was tasked with reviewing the Managed Investment Scheme (MIS) regulatory framework in March 2023, with the threshold to qualify as a sophisticated investor included in the review.

According to a statement from Financial Services Minister Stephen Jones at the time, the review aimed to examine whether the regulatory framework is fit for purpose, identify potential gaps, and consider what enhancements can be made to reduce undue financial risk for investors.

Despite media speculation earlier this year that the threshold to qualify as a sophisticated investor is set to increase from $2.5 million in net assets to $4.5 million, Financial Services Minister Stephen Jones has denied any decision has been reached.

In a video posted to LinkedIn in February, the minister said nothing will be decided until Treasury has completed its review.

“The review is ongoing and Treasury is still looking into the things that they haven’t made their recommendations to government on,” Jones said.

“So obviously, government hasn’t made any decisions about this either. When we do, we’ll maintain our commitment to the Australian people and to investors to work collaboratively and consultatively to make sure that we get the best outcomes for as Australian consumers and investors.”

While the minister conceded that the sophisticated investor thresholds are an “important element” of the terms of reference provided to Treasury, it is just “one element”.

“These thresholds haven’t been looked at in quite some time. We just want to make sure that they are still serving the right purpose,” Jones said.

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 has proposed a $5 million net asset threshold for the wholesale investor test, which it said would bring the number of Australian households eligible back down to 3.1 per cent.

“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.