Two potential side effects have been flagged around changes to the sophisticated investor test, following the completion of a Treasury consultation.
The government recently concluded a consultation into managed investment schemes, and one of the issues flagged was the levels and requirements for the sophisticated investor test.
This has remained unchanged since the introduction in 2002, which means residential property values have caused the number of people eligible for the wholesale investor test to skyrocket by more than 700 per cent.
As such, the Financial Services Council (FSC) and Stockbrokers and Investment Advisers Association (SIAA) 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.
But law firm Clyde & Co believes the changes will disproportionately impact younger, wealthy investors and curtail their investment opportunities.
“[The change] will disproportionately impact Gen Z and lower socio-economic investors (and even some well-off investors), who may be highly financially savvy, in building the capital to support them attaining the Australian dream.
“Financial sophistication is necessary for investors’ protection, together with all the working regulatory infrastructure – ASIC and the consumer groups are effective tools – but we do not think that simply having a large bank balance automatically equals financial sophistication.”
Instead, the firm suggested there should be exemptions to the test for investors who had undertaken an approved course, similar to the ASIC Regulatory Guide 146, to demonstrate their financial literacy and who could demonstrate sufficient ASIC-approved time in a vocation, such as investments or compliance. Finally, ASIC should set a test for the product issuer or distributor and place penalties if they did not comply.
A second downside would be the possible reduction in the volume of money raised by venture capital and angel investors for start-up companies in Australia.
Campbell Newman, managing director of fund manager Arcana Capital in Queensland, told Money Management the “crude” proposals will affect Australia’s standing on the world stage.
“There will absolutely be unintended consequences from this review. Venture capital will be very impacted as they will be unable to raise as much money. Under the proposed changes, around 10 per cent of people who are currently wholesale investors would suddenly be ruled out from making their own decisions about their own money.
“It will also have an impact on Australia’s competitiveness on a global stage as start-up businesses will look at other countries where the limits are lower in order to raise capital.
“The government needs to step back and consider what is happening and come up with a measured response that protects investors but still allows them to work effectively and raise capital.”
“It will materially curtail their investment in cheaper and more innovative digital assets, venture funds and structured products,” the law firm added.
There is a balance between consumer protection and the freedom to be in control of your own decisions. On the one hand, the test protects retail investors from poor/no/lazy advice where it should be given. On the other, it removes an investors ability to access investments which has risks they are happy to accept. The powers that be ought to take care not to slip into ‘nanny state’ regulation. Why should investors be closed out from opportunities only the very wealthy can access?