FSC and SIAA buck call for changes to sophisticated investor test

FSC siaa wholesale investing managed investments treasury

16 January 2024
| By Laura Dew |
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The Financial Services Council (FSC) has recommended against major changes to the income or product values for the sophisticated investor test and called for a safe harbour for AFSL holders.

In its submission to the Treasury's managed investment scheme consultation, the association said the level of the gross income and product value threshold are sufficiently high already for the majority of the population.

Last year, Money Management wrote about how the number of people eligible for the sophisticated investor test has risen by more than 700 per cent since its introduction in 2002 thanks to rising values of residential property.

The test requires investors to have net assets of $2.5 million or an annual salary of $250,000 to be classed as wholesale or sophisticated investors.

At the time of the test’s implementation over 20 years ago, only 1.9 per cent of the population met the criteria.

However, this has since risen to 16 per cent, and the criteria is unchanged at net assets of $2.5 million and a gross income of at least $250,000 per year in the last two financial years.

The association said: “The FSC is supportive of changes to the wholesale investor test and makes a number of proposed changes, including increasing the net asset test for the individual wealth test. 

“We do not consider that changes are needed to the product value threshold or the gross income threshold for the individual wealth test, as these are both sufficiently high in today’s terms that the overwhelming majority of adult Australians would not meet the test to be classified as a wholesale investor.”

It recommended retaining the product value test at $500,000, the gross income test at $250,000 and retaining the net assets at $2.5 million. However, it said the net asset test should exclude the family home or be increased to $5 million if it did include the property.

The Stockbrokers and Investment Advisers Association (SIAA) also felt the limits were sufficiently high and were in line with other requirements overseas.

“We do not consider that there is any evidence that supports an increase in the financial thresholds for the net assets and/or gross income wealth test. There has been very little wage inflation in recent years in Australia. A gross income of $250,000 is a significant multiple of average earnings. 

“The Australian Bureau of Statistics reports the average weekly ordinary time earnings for full-time adults at currently $1,838.10 ($95,581.20 per annum), with skilled and experienced workers earning $108,000 per annum.” 

On the other hand, the Financial Advice Association Australia (FAAA) recommended the net asset value and income test should be amended to exclude principal residence and increased to a $350,000 salary. 

The FSC continued that the sophisticated investor test should be strengthened by more ASIC regulatory guidance or a safe harbour.

A safe harbour would outline the steps an Australian Financial Services Licence (AFSL) holder needs to take to be satisfied on reasonable grounds that a client can be classified as a sophisticated investor while retaining the overall discretion and flexibility of an AFSL holder to make that determination.

Alternatively, regulatory guidance, such as a Regulatory Guide from ASIC, could establish examples or principles for an AFSL holder to determine a clients’ suitability.

“Either of these mechanisms could deem a financial planner who provides personal advice as part of their job who meets the education requirements as an investor with previous investing experience who meets the sophisticated investor test.”

Indexation of the test

The FSC also recommended against indexation of the test as it felt there would be unintended consequences in the form of increased complexity and compliance costs for product issuers, a deterrent for foreign investors, and exclude consumers who find themselves only temporarily classed as wholesale clients.

Instead, a five-year review would be a “more practical mechanism” by balancing the need for certainty and the need for regularly updated thresholds.

The SIAA also agreed indexation was an unsuitable option as it would increase complexity, reduce transparency and fail to account for financial market corrections.

“Our members have told us that indexation would create a constantly moving goalpost which would significantly impact their business, particularly their compliance operations.

“The investment required to keep track of a constantly moving goalpost if indexation was applied to the test would be very significant indeed,” it said in its submission.

If the proposals were approved, the FSC said there could then be a two-year transition time frame to bring in the updated test and grandfathering of existing clients currently classified as wholesale clients following the changes.

“Investors currently categorised as wholesale clients should continue to be treated as wholesale clients in any existing funds they are invested in and be able to reinvest distributions back into the funds and make further investments in the fund without being subject to reassessment of their eligibility as a wholesale client under any revised financial thresholds. 

“A periodic review of the thresholds every five years could expose investors to those same impacts and would to that end further suggest grandfathering as the thresholds change.”

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Submitted by John Telford on Tue, 2024-01-16 10:53

Seemingly it is easy to turn potential problems in the financial market on to consumers while the regulators that are meant to be governing the financial sector avoid accountability and responsibility.

Submitted by Pot on Tue, 2024-01-16 14:22

You can always back self interest to rise to the occasion, particularly in relation to the FSC.

Submitted by Tony G on Tue, 2024-01-16 14:30

No amount of assets or income "creates" a sophisticated investor. The original concept would appear to lean more towards a capacity to cope with "loss", but that is still only relevant when considering investment allocations and ratios, etc. The industry embraces the parameters now because it can remove the requirement of an SOA, but rather than quibble over asset or income levels, we should continue to ask what "record" of advice is genuinely required at any level of investor to support advice.

Submitted by test123 on Thu, 2024-01-18 10:37

test comment

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