FSC calls for ‘less subjective’ sophisticated investor test

FSC wholesale investing advocacy

22 May 2024
| By Laura Dew |
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The Financial Services Council (FSC) is proposing to make the sophisticated investor test less subjective as currently wholesale fund managers are hesitant to apply it.

In a submission to the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into the wholesale investor test, the body argued most focus should be given to the net asset threshold.

Currently, the wholesale investor test allows an investor to access a wholesale product if the licensee is satisfied on reasonable grounds that the client has previous experience in using financial services and investing in financial products. 

The FSC proposes the net asset test is increased from at least $2.5 million to $5 million including the family home, the current income test is maintained at $250,000 and the product value test is maintained at, at least, $500,000.

But it suggested “consideration should be made” to the sophisticated investor limb of the wholesale investor test to allow sophisticated investors who understand the risks and have sufficient experience continue to access them.

“Wholesale fund managers consider this test too subjective (with no regulatory guidance from ASIC on how to apply the test), and as such, they have been hesitant to apply it.

“The FSC supports making this test less subjective for AFS licensees to apply, and we think this will help enhance capital flow to wholesale investment products from appropriately experienced investors.

“The FSC recognises that wealth and income are not perfect proxies for financial literacy and sophistication. Having high dollar amounts that cover an appropriate proportion of the population recognises that generally products that have lower liquidity and carry higher risk are more appropriate for investors who have the financial resources to better bear that risk. 

“Having specific dollar value thresholds also helps provide tests that have objectivity and are therefore easier to apply by the industry. It should also be noted that individuals who come into a significant amount of money through inheritance or have experienced high asset value inflation through their family home may not necessarily be financially sophisticated.”

In formulating the test, the FSC suggested that Australia look overseas at how other jurisdictions apply it.

“The test could have criteria such as previous experience investing in wholesale products, experience or academic qualifications in the finance sector, or experience in directing a large business.

“For instance, the UK has a self-certified sophisticated investor exemption which includes more objective criteria such as having been a company director of a company with at least £1 million turnover, having worked as a finance professional or being a member of a network of angel investors for more than six months.”

Any changes to the wholesale investor test must include permanent grandfathering of current clients to prevent a situation where existing wholesale investors are forced to make redemptions or are unable to make additional investments or reinvestments in the same product. 

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