At a glance
- A parliamentary inquiry is reviewing wholesale investor tests amid reports of misuse.
- Proposals suggest raising thresholds, removing primary residences and requiring client consent.
- Responsibility for classifying wholesale clients may shift from accountants to advisors.
When first introduced in the Financial Services Reform Act in 2001, the wholesale investor and client tests covered 1 per cent of households. Today, they cover 12 per cent and are likely to increase to more than a fifth of Australian households by 2031.
As an accounting professional providing investment or wealth advisory services, you’d be familiar with the threshold tests used to classify clients as ‘sophisticated’ to access complex financial products with fewer consumer protections.
Following long-term economic shifts, the Parliamentary Joint Committee on Corporations and Financial Services is now questioning whether these outdated standards still serve their purpose, and the industry is increasingly calling for updated regulatory frameworks to reflect today’s financial reality.
Challenges with the current standards
The Parliamentary Joint Committee on Corporations and Financial Services Inquiry into the Wholesale Investor and Wholesale Client Tests has highlighted troubling issues around the misuse of accountants’ certificates, with Senators questioning conflicts of interest accountants face when designating clients as ‘wholesale’.
The inquiry heard multiple complaints have been raised with regulators since 2018, with some investors unaware they were placed into high-risk products through wholesale classification.
Within the current framework, responsibility is placed upon accountants to verify clients’ eligibility for wholesale status based on financial thresholds — often without the context of a full advisory relationship.
Most accountants are not licensed to provide financial advice, yet many find themselves as gatekeepers for clients’ access to sophisticated financial products.
The inquiry is also considering the parameters of the wholesale investor and client tests, including the product value test and individual wealth test.
Currently, a client can be classified as a wholesale investor if:
- They invest $500,000 or more in a financial product;
- An accounting certificate certifies they’ve earned a gross income of $250,000 for the past two financial years; or
- They have net assets of at least $2.5 million.
These thresholds have remained unchanged in over two decades and have not been indexed for inflation.
While some industry leaders argue for quick reform, others put forward a case for a longer transition period to mitigate negative effects for existing clients and investors.
Recommendations for reform
A key recommendation with broad support is to raise the financial thresholds of the two tests to better protect the growing number of Australians who, following rising property valuations and wage growth since 2021, now qualify as sophisticated.
The Institute of Public Accountants in its joint submission with other finance industry bodies proposed increasing the thresholds of product value to $1 million, net assets to $4 million and gross income to $350,000
Many, including the Joint Associations and the SMSF Association, also advocate excluding primary residences from wealth calculations, given property values don’t necessarily correlate with financial understanding.
Guy Taylor, Private Wealth Partner at BDO, says a narrow focus on quantitative asset and income limits may not address whether a client is truly sophisticated.
“Just because you don’t meet the asset threshold or are a lower-income earner, you may still be a savvy investor,” he says.
“These investors should not be punished and excluded just because they don’t tick the box on the quantitative thresholds. They deserve the opportunity to qualify and access to these opportunities too,” he says.
Other key suggestions are for client consent to be required for wholesale status and phasing out accountants’ certificate requirements, shifting responsibility to licensed advisers better positioned to evaluate financial suitability.
Taylor adds recent legislation has resulted in advisors offering wholesale-only advice to reduce the compliance burden on their business. This opens up the potential for misuse, he says.
“Retail advice, although it adds an additional level of compliance for advisers (including training, ethical standards, and licensing), it ensures clients receive valuable consumer protections, investment disclosures and transparency on fees,” he says.
Any regulatory reform is likely to alter your role engaging with clients on investments, so it’s worth keeping yourself updated. The committee is scheduled to deliver its report to Parliament by the end of this year and you can expect further updates shortly thereafter.
More information on the joint submission into the inquiry into wholesale investor and wholesale client tests is available here HERE.
