Tax bracket approach suggested to define ‘sophisticated investors’

Brokers, wealth managers and investments managers are likely to find life more difficult if the Government proceeds with proposed changes to the sophisticated investor threshold, according to Datt Capital chief investment officer, Emanuel Datt.

Pointing to a recent Datt Capital study on fraudulent activity in Australian markets, Datt said it highlighted that most predatory behaviour on investors falls within three categories:

1. Unlicensed fraudulent schemes (Ponzis),
2. Aggressive structuring of financial service offerings
3. Conflicted advice provided by non-independent financial licensees.

He noted that the effects of the Government’s proposed changes would be primarily focused on the level of disclosure required in primary or secondary offerings.

Retail offerings necessitate a Product Disclosure Statement (PDS) leading to longer issuance timeframes and higher costs due to larger numbers. On the other hand, wholesale offerings only require an Information Memorandum (IM), resulting in quicker issuances with lower costs.

“Brokers, wealth managers and investment managers across the spectrum are likely to find life more difficult, whilst companies with large customer bases within capital markets that serve retail investors may benefit,” Datt said. “These businesses would likely capture investors previously qualifying as ‘wholesale investors’ who may become self-directed.”.

Datt has suggested what he regards as pragmatic solution to many of the concerns which have been raised.

“Individuals falling within the top tax bracket could qualify automatically as sophisticated investors, while those outside the top bracket could adhere to the previous test thresholds. This would significantly reduce ‘red tape’ for investors and product issuers whilst providing a sensible middle ground for those worried about tax bracket creep.

“In addition, there should be increased regulatory focus on areas where a soft-touch approach has traditionally been observed, specifically within the three categories of fraudulent activity identified in our study,” he says.

Furthermore, Datt advocates for mandating structural protections for investors, such as independent custodial and trustee structures in financial product offerings.

He urges the government to adopt a balanced and holistic approach that empowers investors, strengthens consumer safeguards, and eliminates bad actors from the financial services industry.

He notes “Good legislation enhances sustainable economic activities, while overly burdensome and blunt legislation detracts from economic growth without ensuring the achievement of its objectives.

“In today’s environment it’s imperative that investors understand the nature of their investments as that’s the best protection possible.”