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Wholesale investor test reform has several ramifications: SIAA

Proposed changes to the wholesale investor test potentially have sprawling ramifications for financial advisers and is something some experts say will need to be thoroughly nutted out before the government pushes any reforms over the line.

Potentially updating the 22-year-old wholesale investor test was a hot-button topic at the annual Stockbrokers and Investment Advisers Association (SIAA) Conference.

Ashurst partner Jonathan Gordon told a panel session that most people agree the current test draws "fairly hard boundaries" without any regard to the sophistication of the investment.

Whether it's annual income or net assets - none of them are reflective of the investor's understanding in a financial sense, he said.

"On the other hand, we've got the other aspect of the test, which are sophisticated investor tests, which enables us to qualify an investor based on their understanding of a particular product or service. That's also got challenges."

In essence, Gordon concedes there isn't a "simple solution" as what is currently at play isn't ideal as the tests have not changed since 2002 and have not kept up with the times.

Last August, Treasury conducted a review of the regulatory framework for managed investment schemes (MIS). This included reviewing thresholds for the high-net-worths and product-value classification of investors.

SIAA does not support potential changes in response to the wholesale investor thresholds.

SIAA policy manager Michelle Huckel said: "We pointed out that the regulatory distinction between retail and wholesale is applicable to a range of circumstances in the financial services sector and there's much broader implications than just for managed investment schemes."

"We recommended that any review of a wholesale client definition should be subject to a standalone consultation to enable participation by all relevant industry stakeholders to ensure it takes into account all possible consequential impacts."

On March 20, a Parliamentary Joint Committee on Corporations and Financial Services launched an inquiry into the entire wholesale investor testing framework.

Key facets such as application of the tests in practice, legal requirements, and consequences for investors will all be under the microscope. According to the terms of reference, the government will look at the proposals to change the wholesale investor tests, the ensuing consequences, as well as the costs and benefits.

Ultimately, SIAA supports a distinction between retail and wholesale; the current wholesale investor definitions; and considers that a range of tests are appropriate to provide for the diversity and complexity of the financial services industry.

"We've argued that changes don't need to be made to the current test thresholds. We point out the DDO regime has been an absolute game changer when it comes to the regulation of financial products, because it moves the focus from their wholesale investor test to the appropriateness of the financial product," Huckel said.

SIAA further highlighted implications for equity capital raising if the tests alter.

Yesterday, the association drew up its submission to the inquiry and will shortly publish it once its committee signs off.

"We support the Quality of Advice Review recommendation that stated that high-net-worth clients who have provided a qualified account certificate should also sign a consent. We think this is important. It can apply to more investment categories, and it can also be adapted and applied in circumstances where investors receive no advice for online practice," Huckel said.

Financial Standard is the media partner of the Stockbrokers and Investment Advisers Association Conference 2024.

Read more: SIAAAshurstFinancial StandardInvestment Advisers Association ConferenceJonathan GordonMichelle HuckelParliamentary Joint CommitteeQuality of Advice ReviewTreasury