Asset threshold tweak needs a ‘scalpel not sledgehammer’ approach: FSC

The Financial Services Council (FSC) has urged the Australian Government to increase its investor test asset threshold after more than two decades without change, warning that one-fifth of Australian investors could lose basic retail consumer protections without an update.

The current total asset threshold for investors stands at $2.5 million, including the family home. After this point, investors may be classified as ‘wholesale investors’, meaning they would lose consumer protections like the Design and Distribution Obligations (DDO), the FSC warned.

When introduced in 2001, just 1.5% of households were captured under the current $2.5 million asset threshold. Today, owing in large part to surging property prices in Australia, this threshold would cover 11.7% of households.

The FSC, based on research provided by PwC and Data Analysis Australia, has proposed value that the wholesale investor test net asset threshold be doubled to $5 million, including the family home.

This, the Council argued, “would bring the threshold up to date with changing asset profiles and bring the number of Australian households eligible back down to 3.1%”.

Left unchanged and following current trends, by 2033, more than one in five ‘mum and dad investors’ could lose access to consumer protections, said FSC chief executive FSC Blake Briggs.

Instead, these investors would “be treated as a sophisticated, ‘wholesale investor’ regardless of whether they understand the more complex financial products they can be offered”, leaving them potentially vulnerable to unforeseen financial risks.

While the FSC said it recognised wholesale investors as a “vital part of Australia’s capital markets”, it called on the Government to ensure that “only genuinely sophisticated investors fall within this category”.

Wholesale investors effectively lose retail consumer protections like the Design and Distribution Obligations (DDO), which obliges financial product issuers to take reasonable steps to ensure distribution is consistent with the target market, bans on conflicted remuneration, dispute resolution processes and access to a compensation scheme of last resort in certain circumstances.

The FSC has proposed three changes to the investor test, which include:

• Increasing the net asset test from $2.5 million to $5 million, including the family home;
• Ensuring the sophisticated investor limb is easier to use by making it less subjective; and
• The grandfathering of changes to avoid the re-classification of existing investors, which could force redemptions that are not in consumers’ financial interests.

No change needed elsewhere

The Corporations Act 2001 determines several criteria for an individual to be classified as a wholesale investor, including whether they have:

• They have net assets of at least $2.5 million; or
• They have a gross income for each of the last two financial years of at least $250,000; or
• A person or entity is willing to invest $500,000 or more into the fund.

The financial services peak body believed the latter two criteria were still sufficient and unlikely to capture less sophisticated investors.

The current $250,000 gross income test threshold, as it was when the test was first applied in 2002, still covers fewer than 1% of individuals. The FSC thus recommended no change.

While the percentage of households that have access to more than $500,000 in liquid assets has increased by more than five points (from 2.7% in 2002 to 7.8% today), the Council also recommended no change “given it is unlikely that individuals will invest $500,000 in a single investment”.

“The FSC is urging the Government to use a scalpel, not a sledgehammer, when adjusting the thresholds, to get the balance right between the important role of wholesale products in capital markets, and the need to maintain consumer protections in financial advice,” Briggs said.