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Reforms to wholesale investor rules desperately needed: CPA

Regulation

The accounting body is calling for a review of the wholesale investor tests, with the government currently examining the rules as part of its managed investment scheme review.

By Miranda Brownlee 10 minute read

The wholesale investor regime is in “desperate need” of reform in order to protect both consumers and accountants, according to CPA Australia.

The professional accounting body said as the number of people eligible to be certified as sophisticated investors continues to grow, this is leading to increased risk for consumers.

“A major concern is that the thresholds have not been adjusted in the last two decades,” said CPA Australia’s head of policy Elinor Kasapidis.

“We are concerned that some people are being placed in products and strategies that they doesn’t suit their financial literacy or capability.”

In order to be classified as a wholesale client under Chapter 7 of the Corporations Act, there are four objective eligibility tests under section 761G and one subjective eligibility test under section 761GA with certain financial thresholds prescribed by the Corporations Regulations 2001.

The individual wealth test is satisfied where the person has net assets of at least $2.5 million or gross income of at least $250,000 per year in the last two years and is supported by a certificate given by a qualified accountant.

Research conducted by the Australian National University estimated that in 2021, 16 per cent of Australian adults met the individual wealth thresholds to be classified as a wholesale client, compared to 2 per cent of Australian adults in 2002.

The modelling predicted that under the current thresholds the percentage of Australian adults above the threshold would increase to 29 per cent by 2031.

Treasury’s consultation paper for its review of the regulatory framework for managed investment schemes said that it would be considering the appropriateness of these thresholds given they had not been adjusted since they were introduced.

“It is important to consider the appropriateness of these thresholds in today’s environment and whether they continue to provide an adequate benchmark for determining when a client might be a wholesale client,” the consultation paper said.

The review will explore where the financial thresholds for net asset and gross income should be increased for the individual wealth test.

It will also consider whether certain assets should be excluded when determining an individual’s net assets for the purposes of the individual wealth test.

Ms Kasapidis said there are significant risks in this area for both clients and accountants in this area.

“If a client is deemed to be a sophisticated or wholesale client, many protections that are mandatory for a retail client no longer apply. This includes the provision of a statement of advice,” said Ms Kasapidis.

Accountants providing a certificate to support the classification of a wholesale investor must use their professional judgement to make sure their clients understand the risks involved, she said.

“Accountants may be legally liable if a client is disadvantaged or suffers a loss after signing one of these certificates,” she stated.

The Quality of Advice Review final report also highlighted concerns from stakeholders that the wholesale client financial thresholds were too low and identified a lack of understanding among clients as to the consequences of being considered a wholesale client.

The Review recommended introducing written consent requirements for wholesale clients who meet the net assets or gross income thresholds of the individual wealth test.

This consent would be obtained before the financial product or service is provided to the wholesale client and should be additional to the accountant’s certificate that is currently required.

As part of its review Treasury will also explore whether consent requirements should be introduced and how they can be designed to ensure investors understand the consequences of being considered a wholesale client.

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