Jul 15, 2024 / News

retail / Superannuation / Superannuation Solutions Edition 21

Enquiry into the wholesale investor test

Clients may be aware of the wholesale investor test, which is used to distinguish between wholesale and retail investors. The most common ways an individual may seek to qualify as a wholesale investor are:

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

as certified by an accountant. The certificate lasts for two years before requiring to be renewed.

An individual who is classified as a wholesale investor by meeting one of these limbs can access wholesale investment products. Managed investment schemes designed for wholesale clients only may provide more attractive rates of return. But the trade-off is that wholesale clients do not have the benefit of retail consumer protections such as the Design and Distribution Obligations regime which obliges financial product issuers to take reasonable steps to ensure distribution is consistent with the target market of the product, bans on conflicted remuneration, and they may not have access to dispute resolution processes or to a compensation scheme of last resort in certain circumstances.

Many stakeholders have called for the test to be revised and updated. One encouraging development is that the Federal Parliamentary Joint Committee on Corporations and Financial Services, has commenced an enquiry into the wholesale investor test. 

The thresholds were set in 2002 and have not been subject to any form of review, update or indexation since, with the result that they are no longer reliable indicators of the relative wealth of an individual. In its submission to the enquiry, the Financial Services Council points out that in 2002 around 1% of households met the thresholds but today around 12% of households are potentially classified as wholesale investors. The largest factor in this change is the value of the individual’s house, which under the current rules in included in their net assets. The FSC recommends increasing the net assets test threshold to at least $5m, which would reduce the number of households potentially meeting the test to 3%.

The SMSF Association proposes a different solution, by recommending that an individual’s principal place of residence be excluded from the net assets test. They also recommend the removal of the requirement for an accountant’s certificate. In some cases, providers of financial products provide template certificates that require an accountant to attest to information beyond the statement of fact required to meet the test. 

There are particular issues with the tests in relation to SMSFs. In the case of an SMSF trustee seeking to have their SMSF treated as a wholesale investor, a net asset threshold of $10m potentially applies. In 2014 ASIC released media release 14-191MR, in which stated it “would not take action” if an SMSF trustee was treated as a wholesale investor on the basis of the general $2.5m net assets test, but that “this will not affect any private rights of action that may be available to third parties. Persons providing financial services to trustees of SMSFs need to make their own commercial decisions after considering the legal risks”. 

In the case of individual trustees, it is also unclear if the tests should be applied at the trustee level or on the basis of the individual member’s interest in the fund.
Hopefully the enquiry will produce meaningful recommendations to improve this very important aspect of financial consumer protection.

Please contact your Nexia Edwards Marshall advisor if you have any questions. 

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The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.