Wholesale investor tests up for parliamentary review

The federal government wants to shake up the wholesale investor tests further in launching a parliamentary inquiry into the entire framework, worrying many fund managers operating in the high-net-worth space.

The Parliamentary Joint Committee on Corporations and Financial Services will review the wholesale investor tests to determine if they are still relevant.

According to the terms of reference, the inquiry will cover legal requirements, consequences of an investor meeting the relevant test, and the application of the tests in practice.

There are currently five tests in place to determine if an investor is a "sophisticated" one. Two of the most popular are the product value test whereby an investible asset is $500,000-plus.

Sponsored by Macquarie Fixed income ETFs: The opportunity is now

The other is the individual wealth test in which an investor has either net assets of $2.5 million or gross income of $250,000 per annum for the last two years as verified by a professional accountant's certificate.

The inquiry will also look at the historical development of the wholesale investor tests and compare it with overseas jurisdictions. It will examine how any proposed changes to the test affect the intended and unintended consequences, costs and benefits, and the impact on different cohorts of investors and stakeholders.

In a submission, Marquette Properties managing director Tobias Lewis wrote that he has "grave concerns for our investors, our business, and our industry" if the thresholds increase.

"The reported intention to increase the wholesale investor threshold from its current $2.5 million net assets level to more than $4.5 million would have devasting effects on our existing investor base, our assets and our capacity as a business going forward," he wrote.

Additionally, the proposed changes would "dramatically alter how we operate and service our investor base, as well as our existing investors' current holdings".

Stakeholders have until May 15 to file a submission.

The new inquiry builds on Treasury announcing a review of the regulatory framework in the October 2022-23 Budget. This was followed by opening consultations to shake up the $2.7 trillion managed investment scheme (MIS) sector, which included re-assessing the thresholds last August.

Several stakeholders also expressed their concerns in the MIS review. Angel investing network Brisbane Angels said that increases to the thresholds "worries us, as it might restrict the decision-making freedom of individual investors".

"The existing thresholds enable a wide range of investors to take part in various investment opportunities and are capable of understanding and shouldering the risks linked with sophisticated investments. Raising the financial criteria may impede this autonomy, curtailing many competent investors' abilities to partake in investments they consider appropriate," the firm said.

Corporate watchdog ASIC, meanwhile, is recommending raising the minimum net assets requirement from the existing $2.5 million to $5 million, as well as the gross income threshold from $250,000 to $500,000 per annum.