ASIC doesn’t trust AFSLs on sophisticated investor tests

Mike Taylor

Managing Editor and Publisher

6 November 2024

The Australian Securities and Investments Commission (ASIC) has reinforced its concerns about allowing investors to self-certify as sophisticated investors.

As well, the regulator has reservations about the degree to which licensee can be trusted to be objective in making sophisticated investor assessments.

Answering questions on notice to from the Parliamentary Joint Committee on Corporations and Financial Services, ASIC questioned whether financial services licensees could be sufficiently trusted to assess the status of clients as sophisticated investors.

It said that while it acknowledged the benefit of the current tests, it noted that “the tests rely on an AFS licensee’s assessment of the investment experience of an investor, include a subjective element that might be open to abuse, and rely on an investor presenting evidence to demonstrate their previous experience in using financial services and investing in financial products”.

“There is an inherent conflict because the AFS licensee may benefit from the classification of the investor as being a ‘wholesale client’,” ASIC said in response to a question posed by the committee chair, Senator Deborah O’Neill.

It said the existing tests were not specific about the types of experience, qualifications or knowledge that would satisfy the reasonable grounds tests because they were principle-based requirements.

In doing so, ASIC cited both its own position and that of other submissions including that of the Financial Services Council (FSC) that the wholesale investor tests would benefit from the introduction of objective elements in the Corporations Act, such as requirements about the investor’s financial experience and qualifications.

“ASIC remains concerned with the option of allowing an investor to self-certify as a sophisticated investor because of the inherent difficulties in an investor assessing their own knowledge and experience, and the potential for abuse,” it said.