Parliamentary Committee leaves wholesale investor test alone

• #Financial Regulation

In a great outcome for our clients and for the broader industry, the Federal Parliamentary Joint Committee on Corporations and Financial Services (Joint Committee) has decided against recommending an increase to the current wholesale investor test financial thresholds in Australia.

THE JOINT COMMITTEE’S INQUIRY

A year ago, the Joint Committee commenced an inquiry into the wholesale investor tests for the offer of financial products under the Corporations Act. The Joint Committee was tasked with examining the current tests and particularly, whether the financial thresholds within the tests should be increased.

As a reminder, an investor can qualify as a wholesale under the “wealth test” if an accountant certifies that the investor (and/or entities they control) has or have –

• net assets of at least $2.5 million; or
• gross income for each of the last 2 financial years of at least $250,000.

An investor can also qualify as wholesale if they are acquiring a financial product for at least $500,000.

The tests have not been adjusted or indexed since they were first introduced 24 years ago. There has been concern expressed (including notably by ASIC) that over this time, the proportion of Australians who satisfy the wealth test has materially grown.

There has been a great deal of uncertainty around what the outcome of the inquiry would be, whether the tests would be changed, and if so, how.

MARQ’S POSITION

Our position has always been that the proposals to increase the wholesale investor test thresholds were misconceived. This position was reflected in the submissions we made to the Joint Committee, in which we noted that changes to the tests would lead to a number of potentially severe consequences for both the managers of wholesale funds and many Australians who access wholesale funds to help build their wealth.

MARQ (and others, including a number of our clients) also argued that the Government’s consultation process in relation to potentially changing the tests had been flawed; and any proposals should be subject to a carefully constructed engagement and consultation program.

We kept a close watch on the hearings, including listening to key parts as they occurred.

THE RESULT

The end result of Joint Committee’s inquiry is very pleasing and brings the uncertainty to an end.

The Joint Committee was satisfied there was no evidence to show there had been significant or systemic harm arising from the current wholesale investor test settings. It also noted evidence of some significant negative impacts that could arise from increasing the thresholds, and that a high level of caution in relation to increasing the thresholds is desirable.

In the end, the Joint Committee made only two recommendations, namely that –

• The Government consider establishing a mechanism for periodic review of the wholesale investor tests; and any such mechanism should include mandatory requirements for engagement and consultation with Australia’s investment industry; and
• Subject to a period of stakeholder consultation, the Government amend the Corporations Act to remove the subjective elements of the “sophisticated investor” test and introduce objective criteria relating to the knowledge and experience of the investor.

We believe these are good recommendations.

MARQ thanks its clients who took the time to prepare and lodge submissions to the inquiry. We especially thank Lisa Golden and Andrew Manning of Halo Funds Management, who gave valuable evidence to the Joint Committee, as well as Paul Healy and Greg Preston from Property Funds Association, who also appeared before the Joint Committee.