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Redefining Sophistication: Implications of ASIC's Revised Investor Thresholds


Redefining Sophistication: Implications of ASIC's Revised Investor Thresholds

In its response to Treasury’s consultation on review of MIS, ASIC has proposed significant changes to the definitions of 'wholesale client' and 'sophisticated investor' under the Corporations Act. These changes aim to ensure that in Treasury and ASIC’s opinion only genuinely sophisticated or high-net-worth individuals can access certain investments without the full suite of regulatory protections, thereby better protecting retail investors.


Key Recommendations by ASIC:


  • Increase Financial Thresholds: ASIC proposes to increase the financial thresholds for the individual wealth and product value tests used to classify wholesale clients. The current thresholds of $2.5 million in net assets and $250,000 in gross income for two consecutive years are considered outdated and no longer reflective of an investor's sophistication or ability to bear financial risk.  ASIC’s current proposal suggests raising these in line with inflation since 2001 to about $4.5 million in net assets and $450,000 in gross income.

  • Indexation of Thresholds: To prevent the thresholds from becoming outdated in the future, ASIC suggests introducing a mechanism for periodic indexation of the thresholds in line with inflation.

  • Consistency in Application: ASIC recommends that if consent requirements are introduced for investors to opt in as wholesale clients, these should be applied consistently across both the individual wealth and product value tests.

  • Statutory Protections for Retail Clients: ASIC’s submission highlights the importance of statutory protections for retail clients, such as the design and distribution obligations (DDO) regime, internal dispute resolution requirements, and the provision of product disclosure statements. These protections do not apply to investors classified as wholesale clients.


Implications for Investment Managers and Financial/Wealth Advisors:

 

  • Reduced Pool of Clients: The increase in thresholds may reduce the pool of investors classified as wholesale or sophisticated, potentially leading to a need for managers to include retail clients in their search for funds which in turn means more rigorous disclosure documents and compliance as the scheme will need to be a registered MIS with retail investor protections.

  • Re-evaluation of Investment Offerings: Investment managers may need to reassess their investor base and potentially modify their investment offerings and marketing strategies to align with the revised definitions and investor base.

  • Increased Due Diligence: Financial and wealth advisors may need to conduct more thorough due diligence to ensure that investors meet the updated criteria for wholesale or sophisticated status. This could affect the way they manage compliance risks and the types of advice and products they offer to their clients.

  • AFSL variation: Funds, Fund Managers and Investment Managers and Wealth Advisors may need to seek an AFSL variation to be able to continue providing financial services to their current suite of clients – or they will need to resign themselves to having less clients.

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In Conclusion

 

The increase in compliance costs due to a larger portion of the investor universe being unable to be identified as wholesale may lead to increase in the cost of advice, and in turn to an increase in the number of clients not advised.


However, these proposed changes claim to enhance investor protection while accommodating the needs of the investment management industry. It is crucial for investment managers and financial advisors to closely monitor these developments and prepare for potential regulatory changes that could affect their operations and investor relations.

 

62 Consulting can help you – we have legal and compliance experts who can help you with monitoring this situation; assist you with any licensing issues (including providing short-term coverage for those who need a retail authorisation); setting up frameworks that enable compliance with the more rigorous regulatory requirements of retail clients including DDO (helping with the appropriate identification of target markets, preparation of TMDs; and frameworks for regular reviews); PDS and due diligence frameworks; complaints, incidents management frameworks. Get in touch today if you have questions….




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