Any wholesale investor changes ‘must include grandfathering’: FSC

In a submission to the parliamentary joint committee on corporations and financial services inquiry into the wholesale investor and wholesale client tests, the Financial Services Council (FSC) reaffirmed its position that there is a “good case for updating the net asset threshold in the wholesale client test”.

“When the threshold was first introduced in 2002, it covered around 1 per cent of households. Now, the percentage of Australian households potentially classified as wholesale investors is around 12 per cent,” the FSC submission said.

“If left unchanged, it would cover a fifth of Australian households by 2033 and a quarter of Australian households by 2043.”

The FSC argued that increasing the net assets threshold from at least $2.5 million to at least $5 million, including the family home, would bring the number of households classified as wholesale investors to around 3 per cent.

Alternatively, keeping the threshold at $2.5 million but excluding the net value of the principal place of residence would bring the number of households classified as wholesale investors down to about 5 per cent.

The organisation said it supported maintaining the current income test of at least $250,000 given that continues to cover less than 1 per cent of the population, as well as maintain the product value test of at least $500,000.

“In 2022, 7.9 per cent of households had access to more than $500,000 in liquid assets, and therefore, the ability to meet the product value test, up from around 2.7 per cent in 2002,” the submission said.

“However, we consider it unlikely that an individual would invest $500,000 into a single wholesale investment or several products at a single point in time if they were not already a high-net-worth individual.”

While the FSC has backed an increase to the wholesale investor net asset threshold, it said there needs to be exemptions for existing investors that meet the existing criteria.

“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 re-investments in the same product. An appropriate transition period of two years should apply,” it said.

“If grandfathering is temporary, for example, for two years after the test change with a subsequent application of the test, this will not address the issues created for investors currently classified as wholesale investors who may lose this status if new test thresholds are introduced.”

The submission added that the FSC does not support the “automatic periodic indexation” of the thresholds, as it would create uncertainty and cost for the industry.

“We would be open to a legislative mechanism for periodic consideration of increases to the thresholds (for example, every five years) as part of a statutory review of the appropriateness of the thresholds undertaken by the minister,” it said.

The parliamentary joint committee on corporations and financial services opened the inquiry in March to review the current wholesale investor and client tests, including the “legal requirements, identification of all contexts in which the tests are relevant, the consequences of an investor/client meeting the relevant test, and the application of the tests in practice”.