Recent research from the Financial Services Council (FSC), conducted by PwC and Data Analysis Australia, has revealed a concerning trend: nearly 20% of Australian households could qualify as wholesale investors within a decade, bypassing crucial retail consumer protections.
This shift, driven by increasing property values, risks exposing individuals to complex financial products without adequate understanding or safeguards.
FSC CEO Blake Briggs (pictured above) highlighted the impact of soaring property prices over the past two decades, pushing more Australians into the wholesale investor category due to the appreciation of family home values.
“When the thresholds were first introduced in 2001, only 1.5% of households were captured under the current $2.5 million asset threshold. Today, it’s increased to 11.7%,” Briggs said.
Without intervention, the figure is predicted to exceed 20% by 2033, potentially stripping many of access to vital retail investor protections.
“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.
To counteract these issues, FSC recommends raising the net asset test from $2.5m to $5m (including the family home), refining the sophisticated investor criteria for clarity, and implementing grandfathering provisions to prevent adverse effects on existing investors.
FSC underscored the importance of wholesale investors to Australia’s capital markets but stressed the need for updated thresholds to ensure only genuinely sophisticated investors are classified as such.
Wholesale investors forfeit retail consumer protections such as the Design and Distribution Obligations (DDO), which require financial product issuers to ensure their products are appropriately distributed to the target market, alongside protections against conflicted remuneration, access to dispute resolution mechanisms, and eligibility for a compensation scheme under specific conditions.
The PwC report supporting these recommendations also noted that if the current threshold remains unchanged, 25.5% of households will be classified under the net asset threshold by 2043.
Additionally, it suggested that indexing the original net asset threshold by CPI would adjust it to $4.3m today, impacting 5.2% of households. The report supported the FSC’s stance against modifying the gross income test and liquid asset test thresholds, based on their limited effect on individual eligibility.
FSC believes that fine-tuning the wholesale investor test is crucial for protecting consumers and providing regulatory stability.
The council also emphasizes the role of ASIC’s regulatory tools, such as Product Intervention Power and Design and Distribution Obligations, in safeguarding consumers from harmful financial products.
“ASIC’s ability to protect consumers can also be enhanced by collecting the right information at registration, such as the proposed scheme’s investment strategy and personnel, so that it can identify potential risks early on and devote sufficient surveillance resources,” Briggs said.
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