Last week, the parliamentary joint committee (PJC) on corporations and financial services tabled its report on the wholesale investor and client tests in the Senate.
However, by its own acknowledgment, the committee “did not reach any conclusive view or recommendations on these matters”.
While the report noted a large number of submissions calling for an increase to the wholesale thresholds, including from the Financial Advice Association Australia (FAAA) and the Financial Services Council (FSC), it ultimately decided that there was a lack of evidence of harm and potential negative impacts of changing the levels.
“During the inquiry, the committee was not persuaded by the examples of investor harm identified by ASIC and other submitters as having been caused by the current settings of the test thresholds,” the report said.
Additionally, although it accepted that deliberately fraudulent misclassification of investors was an issue, “increasing the test thresholds would have no impact” on this problem, nor would it affect the “regulation and effectiveness of consumer protections in the retail investment market”.
The committee was far more persuaded by arguments that an increase in the wholesale thresholds would reduce the pool of available investors and clients and, therefore, “generally increase the risk to investors by reducing their ability to diversify and reduce levels of innovation and competition in Australia’s financial services industry”.
“More particularly, the committee heard that increasing the test thresholds would be disruptive to established funds and investors, to the extent that significant numbers of investors currently operating as wholesale investors would be reclassified as retail investors,” it said.
“Reducing the pool of available wholesale investors and clients would also impact negatively on foreign investment; angel and venture capital investment; other specific groups such as women and young investors; and on specific investor groups.”
Instead, the PJC recommended that the government consider establishing a mechanism for periodic review of the operation of the wholesale investor and client tests.
“Given the potential impacts of any change to the wholesale investor and client tests on Australia’s investment industry, the committee considers that any such mechanism should include a mandatory requirement for industry engagement and consultation,” the report said.
While it did not push for any changes to the wholesale test, the committee did recommend amending the Corporations Act to make the sophisticated investor test less subjective in order to bolster its utilisation.
“The committee accepts the view that it is important that a knowledge- and experience-based test is available, as an alternative to product value and individual income and assets tests, for individuals to be able to qualify as wholesale investors and clients in Australia,” the report said.
“As long as they are based on reasonably objective criteria, the committee notes that SIT-style tests can provide a more accurate assessment of a person’s capacity to participate in financial markets as a wholesale investor and client.
“The committee therefore considers that the Corporations Act 2001 should be amended to introduce objective criteria to the SIT. This will ensure that potential wholesale investors are not unfairly or arbitrarily excluded from wholesale markets, and thereby promote participation in, and the flow of capital to, Australia’s wholesale markets.”
