Wholesale investor eligibility spikes by 700%

AFCA complaints wholesale investing managed investment scheme

13 December 2023
| By Laura Dew |
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The number of people eligible for the wholesale investor test has risen by more than 700 per cent since its introduction, and advisers need to ensure they are making their clients aware of the risks.

At the time of the implementation in 2002, only 1.9 per cent of the population met the criteria to be classified as wholesale clients. 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.

If unchanged, 29.1 per cent of the population could be eligible by 2031, representing 3.2 million individuals.

The problem is many people may have these assets, thanks to residential property incomes and superannuation growth, but lack the financial literacy to be classed as a sophisticated investor.

As a result, firms are being warned to ensure their clients are aware of the risk of falling into this category in terms of forfeiting their consumer protections. 

In a submission to the inquiry into managed investment schemes, the Australian Financial Complaints Authority (AFCA) said it has seen a trend of complaints being received from people who have been put in this category and subsequently encountered problems.

Firms need to “diligently and genuinely” assess whether their client meets the threshold and explain the consequence of this to them, AFCA said. It has found that clients lack the understanding of how a product or scheme works, the related risk of the product or the reduction in consumer protection. 

“This experience suggests caution about assuming individuals meeting these tests are financially literate and always have the knowledge, experience or means to take on the additional risks typically commensurate with wholesale investments. 

“We also note ASIC’s concern about retail investors being ‘reclassified’ at a point in time without merit, in order to gain access to a particular product. We have seen this theme in complaints lodged at AFCA. 

“We consider that a decision or assessment about whether a client meets the definition of a wholesale or sophisticated investor should not be left to investor attestations and passive acceptance by the advice provider or RE. Rather, it should be an active decision by the advice provider or RE after considered assessment and ensuring records are maintained to demonstrate the context in which consent was obtained.”

The Financial Advice Association Australia (FAAA) said: “The FAAA recommends the introduction of an obligation that would apply to providers not to treat a client as a wholesale client where there are reasonable grounds to question the evidence that has been provided to demonstrate qualification with the wholesale client wealth test, or if there are grounds to believe that the client does not understand the product(s) or the basis for being treated as wholesale.”

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Ardea Diversified Bond F
144.00 3 y p.a(%)
Hills International
63.39 3 y p.a(%)