Peak Body Claims Classification for ‘Professional Financial Investor’ is Outdated and in Need of Reform
The FAAA was concerned that the current threshold would subject a number of investors to high risks due to misclassification.
A peak financial advice body has suggested raising the threshold for classifying investors specializing in riskier investments to protect them from harm caused by misclassification.
During a recent parliamentary inquiry hearing, Philip Anderson, a general manager at the Financial Advice Association of Australia (FAAA), highlighted the issue of the outdated “wholesale investor” regime that needed reforms to keep pace with market developments.
Wholesale investors generally possess more experience, knowledge, and capital compared to regular retail investors.
To qualify as a wholesale investor, individuals must meet specific criteria, such as investing at least $500,000 (US$337,000) in an investment fund, having a gross income of at least $250,000 for each of the last two financial years, holding an Australian Financial License, or having a net asset of at least $2.5 million.
Due to the nature of their investments, wholesale investors face higher risks but have fewer compliance requirements from the Australian Securities and Investments Commission.
Moreover, they do not receive protection under the Future of Financial Advice reforms.
Proposal to Raise Threshold of Wholesale Investors
Anderson proposed raising the barrier of entry for wholesale investors, arguing that the current threshold was inadequate in protecting vulnerable investors who were misclassified.
He emphasized the need to update the wholesale client thresholds to better align with current economic conditions to prevent consumers lacking necessary experience, financial expertise, and loss capacity from being wrongly classified as wholesale clients without essential protections.
Under the FAAA’s proposal, Anderson suggested amending the law to increase the threshold for asset and income tests for wholesale investors and instituting an indexation of these thresholds.
He also recommended introducing a financial literacy or capability test, as well as implementing a clear statutory warning and an informed consent process before treating investors as wholesale clients.
Anderson stated, “Our recommendations are designed to improve consumer protection while preserving the flexibility required by genuine wholesale clients.”
He pointed out the considerable growth in wealth among Australian households over the past two decades, primarily driven by rising property values.
Concerns About FAAA’s Recommendations
A committee member raised concerns about the FAAA’s proposal to raise the threshold for wholesale investors potentially driving startups seeking capital to overseas markets.
Responding to these concerns, Anderson acknowledged the challenge of balancing competing priorities.
He emphasized, “We don’t want to hinder startups’ ability to raise funds, but we are wary of investors being placed into investment products as wholesale clients without the necessary skills and capacity.”
While acknowledging the complexity of finding a solution, Anderson stressed the government’s need to assess the suitability of individuals to be classified as wholesale investors.
Another committee member inquired about the impact on existing wholesale investors if they fail the proposed higher thresholds.
In response, Anderson suggested a transition plan that does not forcefully remove wholesale investors from their current investments.
He emphasized, “Those currently treated as wholesale investors and comfortable with their investments should not be compelled to make changes due to the proposed thresholds.”
