financial advice, Investments

Wholesale investor threshold must be lifted

Net asset threshold Wholesale investor test Sophisticated investor Gross income test SMSF

The FSC has called for the doubling of the wholesale investor threshold, noting it now covers many people who sit outside that definition.

A lack of changes to the wholesale investor test means it now applies to more than 10 per cent of Australian households and will climb to nearly 20 per cent in less than 10 years, according to the Financial Services Council (FSC), which has recommended doubling the test’s net asset threshold.

Research commissioned by the FSC, and undertaken by PwC and Data Analysis Australia, found 11.7 per cent of Australian households now qualify for the definition of a wholesale or sophisticated investor and this figure would climb to 19.1 per cent by 2033, placing them outside the retail consumer protection regime.

The threshold for the wholesale investor individual wealth test is defined as having net assets of $2.5 million or gross income of $250,000 a year in the past two years, and has not changed since its introduction in 2001.

FSC chief executive Blake Briggs said the net asset threshold should be set at $5 million, including the family home, in recognition of the impact property prices have had on lifting overall household assets, thus reducing the number of eligible households to 3.1 per cent.

“The increase in property prices in the past two decades since the threshold was implemented has contributed to more Australians being classified as wholesale investors because of the increase in value of the family home,” Briggs said.

“When the thresholds were first introduced in 2001, only 1.5 per cent of households were captured under the current $2.5 million asset threshold. Today, it’s increased to 11.7 per cent.

“If the threshold is left unchanged, these trends are set to continue, so that by 2033, more than one in five mum and dad investors could cease to have access to the consumer protections that are inherent when you are defined as a ‘retail investor’ and instead be treated as a sophisticated, ‘wholesale investor’ regardless of whether they understand the more complex financial products they can be offered.”

Alongside doubling the net asset threshold, the FSC stated the current $250,000 gross income test threshold, which still only covers less than 1 per cent of individuals, should remain unchanged as should the product value test of $500,000.

“Two-point-seven per cent of households in 2002 had enough access to liquid assets to meet the product value test of $500,000. Now, 7.8 per cent of households have access to over $500,000 of liquid assets to meet the test. The FSC recommends no change given it is unlikely that individuals will invest $500,000 in a single investment,” Briggs said.

“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.”

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