Wholesale investor test paper examines calls for change

By Judith Fox, CEO, SAFAA

Calls for change to the wholesale investor test from members of academia, the legal profession and the financial advice industry itself have increased in frequency over the past few years. The argument for change is based primarily on the fact that the monetary threshold tests have not been amended since they were introduced in 2002 and the impact of inflation, alongside the sustained boom in Australian home values in parts of the country, has seen the number who qualify as wholesale increase significantly.

There is currently recognition that well-intentioned but ill-founded policy and regulation has had a deleterious impact on access to and affordability of financial advice over the past few years. The unintended negative consequences of those policy changes are now subject to consideration as to how best to ameliorate them, with recognition from both the Government and Opposition that a different approach is required.

Given the significant implications for financial advisers and their clients should any change to the wholesale investor test be introduced, SAFAA issued a discussion paper examining key questions that need consideration prior to any decision to introduce change.

The paper examines whether there is evidence of harm or market failure to support calls for change, and also explores how the test is applied in practice within firms. It sets out the existing regulatory protections for wholesale investors and examines the consequences for advisers and investors of a change in the test.

Many wholesale clients would no longer meet the test should it be amended. Given that clients seek access to wholesale client opportunities, licensees have structured their business to accommodate client demand and clients have built their investing strategy on the current model. ‘Changes to the test that re-classify clients may result in them losing access to their adviser of choice or force them to sell down their holdings. Any change would disadvantage a significant cohort of Australian investors who have not been consulted on their views of whether such a change is welcomed by them,’ the paper notes, commenting that the voice of the client must be sought to assess if they agree with a change.

Change to the wholesale client definition could also prove particularly disruptive to financial advice firms that had already moved away from advice to retail clients or were set up to deal with wholesale clients only. With business models relying on the definitions in structuring their businesses to meet client demand, change will bring disruption and attendant costs associated with implementing change and could render firms unviable as the pool of potential clients diminishes. These impacts would not be uniform across the financial services industry, with some businesses and some clients being much more affected than others.

The wholesale investor test is currently the subject of two consultations: the Government’s Quality of Advice Review – Draft Terms of Reference and the Australian Law Reform Commission’s Interim Report A Financial Services Legislation ALRC Report 137 (November 2021) both have this issue listed for consideration. The paper aims to facilitate an informed discussion in light of these two reviews.

This article is general information only.

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