Index wholesale investor test says ASIC

Mike Taylor

Managing Editor and Publisher

23 May 2024

The Australian Securities and Investments Commission (ASIC) has recommended that the wholesale investor tests be increased and then indexed to account for inflation.

The regulator also wants to introduce penalties and other sanctions for misuse of the accountant’s certificate mechanism for classifying wholesale investors and whole clients along with revision of the current licensee assessment of an investor or client as wholesale.

In a submission filed with the Parliamentary Joint Committee on Corporations and Financial Services review of the wholesale investor regime, ASIC said it had “witnessed the harm that can arise when investors are classified as wholesale, but do not have the financial literacy or resources to weather financial loss.

ASIC said that, in summary, we recommend:

• increasing the financial thresholds for classifying a person as wholesale to account for inflation;
• introducing a statutory mechanism to increase the financial thresholds over time;
• introducing penalties and other sanctions for misuse of the accountant’s certificate mechanism for classifying wholesale investors and clients; and
• revising the current subjective test for Australian financial services (AFS) licensee assessment of an investor as wholesale to be more objective or increasing the level of prescription in the test.

The regulator also pointed out that In other jurisdictions, the tests to distinguish between retail and wholesale clients are based on higher financial thresholds and/or are supplemented by prohibitions on certain investments being offered to retail clients.

“As Australia’s more liberal regime does not generally prohibit specific investments for retail clients, it is critical that our wholesale and retail settings remain effective over time,” the ASIC submission said.

ASIC has observed numerous instances of serious harm suffered by investors who are not financially sophisticated or considered wealthy by today’s standards, after entering wholesale-only investments.

We consider that the wholesale tests should be updated to better ensure that investors who are, in essence, retail investors are recognised as such and receive the benefit of the important statutory protections that apply only to retail investors.

We recognise that some businesses and investors may wish to retain or even reduce the current settings to support fundraising and investor access to investment opportunities. Our view is that:

(a) under an appropriately framed increase to the wholesale tests, the impact on business will not be significant, and there would still be avenues for fundraising; and

(b) some investment opportunities remain too speculative, complex or risky to be accessed by clients who are truly retail clients.