Current investor thresholds ‘failing’ to protect consumers: FAAA

In a submission to the parliamentary joint committee on corporations and financial services inquiry into the wholesale investor and wholesale client tests, the Financial Advice Association Australia (FAAA) has pushed for “a high barrier to entry and restrictions into the wholesale client space”.

“FAAA members are concerned about consumers who lack the necessary knowledge, understanding and experience of financial matters to make informed decisions as wholesale clients,” the submission said.

“This includes the category of consumers who do not have capability to make considered financial decisions or incur financial loss through high-risk investments. The lack of disclosure and conduct obligations that apply to advising wholesale clients creates an unacceptable risk for such consumers.”

According to the FAAA, the increase in the number of individuals that meet the wholesale investor thresholds is concerning.

Australian National University modelling found that just 1.9 per cent of the population were eligible to be classified as wholesale clients in 2002.

However, this figure had risen to 16 per cent in 2021 and could hit 29.1 per cent of the population by 2031 and 43.6 per cent of the population by 2041 if there are no changes to the regime.

“In our view, there must be a balance between protecting vulnerable consumers and providing regulatory relief and broader options for genuine wholesale clients,” the FAAA said.

“Importantly, there needs to be better protections for those consumers who currently fall on the boundary between retail and wholesale clients – consumers who are asset rich, cash poor, with little capacity to lose money and who may not be financially sophisticated despite meeting the test.

“This is where the current thresholds are failing to meet expectations in protecting consumers.”

Among the changes that the FAAA recommended in its submission was the exclusion of the primary residence from the net asset threshold test, while also arguing that the threshold “be increased to $2 million for an individual, doubled for a couple”.

However, it has also pushed for indexation in all of the test thresholds every five years in line with Average Weekly Ordinary Time Earnings (AWOTE).

Specifically, the FAAA said the product value test should remain at its current level of $500,000 and be indexed every five years based on AWOTE, in minimum increments of $5,000, while the net asset test indexation would see it increased in multiples of $5,000 increments every five years.

For the income test, the FAAA said it should be increased to $450,000, which would bring it broadly in line with where it would sit had it been pegged to the CPI since its introduction in 2001 ($437,297 in December 2023 according to FAAA modelling). It would also be indexed in line with AWOTE and increased in multiples of $5,000 increments every five years.

The FAAA explained that the consequences of any changes to the regime must be considered to “ensure a balanced approach” and avoid putting unnecessary restrictions on “genuine” wholesale clients.

“FAAA member feedback suggests that genuine wholesale clients often have an entrepreneurial mindset and are actively engaged with their financial circumstances,” the submission said.

“Such clients seek to improve their return on investment by investing in higher-risk opportunities they are comfortable with.”

It added: “When seeking financial advice, such clients generally want information pertinent to the actual advice provided. Feedback indicates that these clients do not want to be bogged down in disclosure material and consider the requirements in the retail client regime create an unnecessary burden on them as clients – it slows the advice process and wastes their time.”