Wholesale investor thresholds a ‘blunt instrument’: FSC

Speaking at a parliamentary joint committee on corporations and financial services inquiry hearing into the wholesale investor and wholesale client tests, Financial Services Council (FSC) executive director, policy, Chaneg Torres reaffirmed the need to update the net asset threshold.

“We consider that the wholesale investor test mostly remains fit for purpose, but in our submission, we do acknowledge that there is a case for updating the net asset test threshold,” Torres said.

“Our recommendations for updates for the wholesale investor test are relatively modest.”

Essentially, the FSC has called for the net asset test to increase from $2.5 million to $5 million if it includes the family home or maintaining it at $2.5 million but excluding the family home.

In its previous submission to the inquiry, it had detailed that the threshold only covered around 1 per cent of households when it was introduced in 2002, but now covers 12 per cent of households.

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

According to its figures, an increase to $5 million, including the family home, would bring the number of households classified as wholesale investors to around 3 per cent, while the alternative of excluding the family home and retaining the $2.5 million threshold would bring it down to about 5 per cent.

Speaking at the hearing, Torres argued that these recommendations represented a “modest change” rather than a complete overhaul, but that if the government is looking to make tweaks to the broader regulatory regime, then the wholesale investor thresholds could be a place to look “for the purposes of regulatory hygiene”.

“Just an updating of it given the changes in economic circumstances and the number of consumers or households that now fall under the threshold,” he said.

“We’re not wedded to this number, to be clear, but it’s something that we thought there’s a decent case to be made that that aspect of the test could be updated, but we’ve also said that the rest of the test actually remains pretty fit for purpose.”

However, Torres noted that the defined thresholds are also simply “blunt instruments” when designating financial sophistication and the ability to bear risk.

“It’s important to recognise that there probably is a correlation between wealth and financial sophistication, but that’s not always neat,” he said.

“There’s also the ability to bear risk. If you have greater assets, you’re able to bear losses that that are of higher risk when it comes to some wholesale investments. And you’re also able to bear the liquidity risks as well, because you’ve got enough that you don’t need sort of quick cash flow, you’re able to park your money there for a while.

“So, those numeric thresholds, they are a blunt instrument, but they do serve a purpose. They’re also, being objective, easier for financial services firms to apply.”

He added that the sophisticated investor test serves as a recognition of this limitation of the wholesale test.

“You do need another threshold to recognise that financial sophistication or the ability to bear risk may not always, in all individual circumstances, be correlated to your income or your assets,” Torres 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”.