Govt to better define retail and wholesale investors

The Federal Government has released an options paper forming a key part of the Future of Financial Advice reforms dealing with future definitions of retail, wholesale and professional investors including lifting the key product thresholds.

The options paper, released by the Assistant Treasurer and Minister for Financial Services, Bill Shorten, would at the very least see the financial product value threshold lifted from the current level of $500,000 to $1 million and canvasses giving financial services licensees more discretion in determining who can be regarded as a wholesale client.

One of the underlying considerations of the Government’s options paper is that average incomes and investment values have increased since the ground rules were last changed as a result of the introduction of the Financial Services Reform Act (FSRA) nearly a decade ago.

Included in the examples cited in the options paper are the Australian local councils which lost millions of dollars because they were unwittingly exposed to higher risk products such as collateralised debt obligations.

Among the options canvassed is the simple retention and updating of the current arrangements “to better reflect and take account of the problems encountered during the global financial crisis and the time which has elapsed since the current tests were enacted”.

The second option canvassed involves removing any distinction between wholesale and retail clients with all investors except professional investors receiving the protections and disclosures afforded to retail clients, while the third option canvasses introducing a “sophisticated investor test”.

The proposed “sophisticated investor test” would be based on the actual financial literacy of the investor.

Announcing the release of the options paper, Shorten indicated at least a part of the Government’s thinking when he noted the global financial crisis had revealed the manner in which clients without the necessary investment experience had been exposed to complex financial products.

“We need to make sure the line between retail and wholesale clients properly identifies those in need of regulatory protection,” he said.