Lack of evidence sees ASIC lose wholesale investor argument

ANALYSIS

The Parliamentary Joint Committee on Corporations and Financial Services has delivered the Australian Securities and Investments Commission (ASIC) a loss on the wholesale/retail investor regime citing a lack of evidence of investor harm.

In fact, the committee’s final report pushed back on ASIC and other proponents of toughening up the sophisticated investor test by noting that the effects of inflation on who qualifies as a sophisticated investor is not, of itself, sufficient justification for changing the current regime.

The outcome represents a win for the investment sector, notwithstanding the fact the committee also recommended the regime should be subject to a periodic review regime and that more objective criteria should be applied to the knowledge and experience of people before they are deemed “sophisticated” investors.

But at the heart of the committee’s ultimate position was “the lack of evidence of harm arising from current test thresholds”.

“…during the inquiry, the committee was not persuaded by the examples of investor harm identified by ASIC and other submitters as having been caused by the current settings of the test thresholds,” the final committee report said.

“First, the fact that so few examples were able to be cited did not provide sufficient evidence of significant or systemic harm arising from the current settings of the test thresholds per se. The committee considers that the paucity of examples in fact tends to support the view that the current test thresholds settings remain appropriate, notwithstanding the greater proportion of people meeting the test thresholds,” it said.

“Second, legitimate questions were raised regarding the relevance and extent to which the few examples cited actually demonstrated problems with the current test threshold settings. The committee considers that the examples provided were not in fact related to problems arising from inexperienced or unsophisticated investors being incorrectly classified due to the effect of inflation on the test thresholds and suffering losses in connection with wholesale investments.

“In fact, these examples merely demonstrate a number of individual instances of incorrect and fraudulent classification of investors, in many cases involving retail rather than wholesale investors,” the report said.

“The committee notes that increasing the test thresholds would have no impact on deliberately fraudulent misclassification of investors or on the regulation and effectiveness of consumer protections in the retail investment market.”

“Similarly, the committee was not persuaded by prima facie arguments that, relative to when the tests were first introduced, simply because the proportion of Australians that can qualify as wholesale investors has increased due to inflation there must therefore be a cohort of wholesale investors who are vulnerable and therefore unqualified to participate in wholesale markets.”