As part of the Government’s Future of Finanical Advice reforms, the Assistant Treasurer and Minister for Finanical Services and Superannuation, Bill Shorten, has released an options paper reviewing the distinction between retail and wholesale clients in the Corporations Act 2001.
In his media release Mr Shorten states that “the distinction between retail and wholesale clients has not been significantly updated in 10 years. During the GFC, we saw clients wtihout the necessary investment experience exposed to complex finanical products on the wholeale market”.
The paper outlines a variety of possible options, including:
- Differentiating between retail and wholesale could be based on a range of factors
- Ensuring any test takes into account the client’s financial literacy
- Raising the product threshold to keep pace with inflation – suggestion to raise it from $500,000 to $1,000,000
- Introducing an indexing mechanism for thresholds so that the amounts remain relevant
- Excluding illiquid assets – such as primary residence and superannuation – from the net wealth threshold; as high wealth in illiquid assets may not reflect financial literacy or high level dealings in financial assets
- Requiring clients to specifically acknowledge instances where they will be classed as wholesale – i.e. an ‘opt-in’. This is to counter any cases where a client can be deemed wholesale without their knowledge or consent (i.e. transaction size)
- Meet two out of three requirements – currently clients only need to meet one requirement
- Introduce extra requirements for certain complex products – such as CFDs
- Repeal the ‘sophisticated investor’ test under S761GA – by strengthening wealth threshold tests there would be less need for a subjective test to classify investors
- Removing the distinction between wholesale and retail clients – all investors, except ‘professional investors’ (s9) would receive disclosure documents and protections
- Introducing a ‘sophisticated investor’ test as the sole way to distinguish between wholesale in retail clients – i.e. the most accurate distinction would be based on the financial literacy of the investor
- Leave things the way they are
Other items for discussion include:
- Is the definition of ‘professional investor’ still valid?
- Do any classes of investor need to be added or removed from the professional investor list?
- Should professional investors continue to be subject to the same protections and disclosures that they currently receive?
Superannuation
Clarification regarding interpretation of s761G, and whether “in relation to a superannuation product” applies to financial services and products made available to the trustee of a superannuation fund (other than superannuation products).
Submissions
The closing date for submissions is 25 Februrary 2011.
Submissions can be made to:
Future of Financial Advice
Department of Treasury
Langton Crescent
Canberra ACT 2600
Email: futureofadvice@treasury.gov.au
For further information:
Read the Minister’s media release here:Government releases options paper on investor protection threshold
Read the Options Paper here:Wholesale and Retail Clients