The Parliamentary Joint Committee on Corporations and Financial Services recently released its Report on Wholesale Client Tests, recommending that no immediate changes should be made to the current thresholds.
This inquiry was initiated in response to concerns that the existing thresholds—$2.5 million in net assets or $250,000 in annual income—no longer effectively distinguish sophisticated investors from retail clients, primarily given the rise of property values.
The Committee considered submissions from industry bodies, financial advisers, consumer advocacy groups, regulatory agencies and industry participants. While some stakeholders supported raising the thresholds or introducing a more nuanced eligibility test (e.g., financial literacy assessments), others warned that such changes could reduce investment opportunities for legitimate wholesale clients and increase regulatory burdens. Ultimately, the Committee found no strong evidence of widespread consumer harm under the existing framework and recommended maintaining the current regime while implementing a mechanism for future reviews with thorough consultation.
The one recommendation for change was to the sophisticated investor test – with the Committee recommending a more objective criteria rather than the current subjective test. The Committee found that a more objective test would enable more licensees to utilise this classification.
Many financial services participants will give a sigh of relief in response to a ‘no change’ recommendation to wholesale client thresholds, given the level of upheaval a change would have meant. However, given recent AFCA determinations, AFSLs need to be vigilant about the proper classification of clients.
If you are relying on the individual wealth test to qualify someone as a wholesale client, the client must be treated as retail until you actually hold the complying accountant’s certificate. A recent AFCA determination involved clients being treated as wholesale (as they held the relevant net assets) before the accountant’s certificate was obtained and AFCA reiterates that until the certificate is held, the client is a retail client.
Another recent determination involved a firm that had become a member of AFCA even though they were not legally required to do so based on their misinterpretation of requirements. The firm was subject to an AFCA claim which was successful and had to pay compensation. Another reminder that if you are a member of AFCA, you are open to claims, even from wholesale clients. AFCA does have discretion to hear these complaints.
A final reminder that for superannuation related advice (setting up a SMSF, contributions, pensions, rollovers etc), the client will always be a retail client unless you are advising the SMSF trustee (not the member) and the fund has at least $10M.