Removing the financial threshold test
The financial threshold test should be removed, according to Super Consumers Australia and a leading consumer advocacy lawyer, as measuring net worth is an unreliable indicator of financial literacy.
The financial assets test was based on the assumption that people with a net wealth of $2.5 million or gross income for each of the last years of $250,000, automatically had the high level of financial knowledge required to understand complex products.
The definitions of ‘retail’ and ‘wholesale’ clients in chapter 7 of the Corporations Act 2001 were under review in the Australian Law Reform Commission’s (ALRC) inquiry into the simplification of financial services legislation, falling into the Interim Report A which was tabled to Parliament in November.
Speaking to Money Management, Super Consumers Australia policy manager, Franco Morelli, said: “In the context of high capital city house prices and a maturing superannuation system, a lot of Australians may end up being classified as wholesale investors without necessarily having the knowledge required.
“This test needs to be better aligned with people’s actual financial knowledge and sophistication rather than how much money they have. That will require a broader review of the policy settings.”
Morelli said the first steps towards a more adequate system would require financial thresholds to be increased in line with inflation and pegged to the Consumer Price Index going forward.
Maurice Blackburn principal lawyer, Josh Mennen, agreed the way sophisticated investors or a wholesale investor had been classified had been overly weighted towards their financial metrics.
“And so it really loses its practical benefits and what it ends up meaning is that it gets used as a cover to circumvent disclosure and other regulatory obligations when providing financial services to people who actually need to be protected,” he said.
“And that's been a significant problem. And I've acted for a number of people who have been misclassified in that way.”
In his submission to the ALRC inquiry, Mennen recommended there be regulatory requirements expressly requiring financial service providers to give and document deeper consideration of a consumer’s financial literacy, rather than the test being about the consumer’s income and assets.
AUTHOR
Liam Cormican
Recommended for you
With an advice M&A deal taking around six months to enact, two experts have shared their tips on how buyers and sellers can avoid “deal fatigue” and prevent potential deals from collapsing.
Several financial advisers have been shortlisted in the ninth annual Women in Finance Awards 2025, to be held on 14 November.
Digital advice tools are on the rise, but licensees will need to ensure they still meet adviser obligations or potentially risk a class action if clients lose money from a rogue algorithm.
Shaw and Partners has merged with Sydney wealth manager Kennedy Partners Wealth, while Ord Minnett has hired a private wealth adviser from Morgan Stanley.
