No change to wholesale investor test thresholds as PJC tables report
The wholesale investor test thresholds will remain unchanged, after the parliamentary Joint Committee on Corporations and Financial Services (PJC) issued its report on the wholesale investor test inquiry, which commenced in March 2024.
The PJC tabled its report to the Senate last week. The report noted a large amount of submissions, including those by Property Funds Association of Australia (PFA), which argued against any changes to the thresholds.
While the PJC “…did not reach any conclusive view or recommendations on these matters”, it raised some important points and made two recommendations, which could influence future review of the wholesale investor test thresholds and the sophisticated investor test.
A lack of evidence for change
In its report, the PJC said there was a lack of evidence that a growing pool of wholesale investors, which has largely increased due to inflation over time, has led to greater harm for investors or the investment industry:
“…the committee considers that there is a lack of evidence showing that this increase to the potential pool of wholesale investors has in fact led to any significant or systematic harm to particular classes of investors, or to the Australian investment industry more generally.”
The PJC went on to say:
“…the paucity of examples in fact tends to support the view that the current test thresholds settings remain appropriate, notwithstanding the greater proportion of people meeting the test thresholds.”
The committee also noted:
“…increasing the test thresholds would have no impact on deliberately fraudulent misclassification of investors or on the regulation and effectiveness of consumer protections in the retail investment market.”
PJC’s report mentioned a lack of external consultation from ASIC on the potential harms and benefits to industry, while the regulator had recommended changing the wholesale investor test thresholds:
“The committee considers that, as the chief regulatory body for Australia’s financial system, it is incumbent on ASIC to ensure that its significant policy recommendations are underpinned by appropriate research, including meaningful consultation with industry stakeholders.”
Key recommendations from the report
The PJC report made two recommendations: one regarding periodic reviews for the wholesale investor test thresholds; and one regarding potential consultation and clarification for the sophisticated investor test.
Recommendation 1: That the government consider establishing a mechanism for periodic review of the operation of the wholesale investor and client tests; and that any such mechanism include mandatory requirements for engagement and consultation with Australia's investment industry.
The PJC strongly agreed with stakeholders regarding need for extensive consultation on any future plans to review the wholesale investor test thresholds.
They said:
“…the inquiry has demonstrated a need for consideration as to the most appropriate mechanism for periodically reviewing the operation of the wholesale investor and client tests, including the settings of the relevant thresholds.”
And:
“Given the potential impacts of any change to the wholesale investor and client tests on Australia’s investment industry, the committee considers that any such mechanism should include a mandatory requirement for industry engagement and consultation.”
Recommendation 2: That, subject to a period of stakeholder consultation, the government amend the Corporations Act 2001 to remove the subjective elements of the sophisticated investor test and introduce objective criteria relating to the knowledge and experience of the investor.
The PJC inquiry found significant stakeholder interest in the sophisticated investor test (SIT) as a “…robust alternative to the wholesale investor and client tests based on product value and individual income and assets thresholds”.
But the SIT is currently underused due to its subjective nature – AFS licensees are reluctant to qualify investors via this test as it raises issues around liability and conflicts of interest.
The PJC supports a SIT based on “reasonably objective criteria”, which could provide “…a more accurate assessment of a person’s capacity to participate in financial markets as a wholesale investor and client”.
Thanks to the PFA Issues and Regulatory Committee
The PFA is delighted to see that common sense has prevailed and the PJC has recommended no changes to the wholesale investor test thresholds. PFA also welcomes the two recommendations by the PJC regarding future consultation and a more objective SIT.
PFA wishes to thank the PFA Issues and Regulatory Committee (IRC), led by committee Chair, Harry New, for their hard work in providing submissions to the PJC inquiry.
The IRC argued that unlisted property funds would be disproportionately impacted by changes to the wholesale investor test thresholds, as many unlisted property funds are offered to wholesale investors only.
PFA maintains that most unlisted property funds are among the simplest investments to understand, and already have adequate protections in place.
If you have any questions for the PFA’s IRC, please contact pfa@propertyfunds.org.au
PFA members benefit from access to networking and educational opportunities, industry research, and greater connection with the unlisted property funds industry – click here to find out more.