As part of its "Future of Financial Advice" package of
reforms, the Commonwealth Government has announced a review of the
distinction between "wholesale clients" and "retail
clients" for the purposes of financial services
The review seeks to assess whether amendments to these key
concepts in Australia's regulatory framework are necessary or
desirable to address problems exposed during the Global Financial
Crisis: in particular, investors without the necessary experience
to invest in complex financial products nevertheless falling within
the definition of "wholesale client" and therefore
missing out on the range of protections afforded to "retail
In January 2011, the Government released an options
paper1 considering the appropriateness of the current
definitions, canvassing potential options for reform (including
examining experience and trends offshore) and calling for
submissions from interested parties.
The paper poses the questions: "Which investors need
protection? Where should the line be drawn?".
The distinction between wholesale and retail clients is central
to Australian financial services regulation, and any change will
have far-reaching implications for the industry. The potential
options for reform presented by the paper include:
retaining and updating the current regime (including by
amending the relevant financial thresholds, introducing an indexing
system for the thresholds, excluding certain classes of assets from
calculation of asset values, and introducing extra requirements for
certain complex products);
removing the distinction between wholesale and retail clients
– under this option, all investors other than
"professional investors" would be treated as retail
clients, representing a very substantial expansion of the reach of
the retail regulatory regime; and
introducing a subjective "sophisticated investor"
test as the sole distinction between wholesale and retail clients,
requiring a case by case factual assessment of a particular
investor's level of financial sophistication.
If your organisation is involved in carrying on a financial
services business, the review presents an ideal opportunity for you
to contribute to the consideration of this critical issue.
Any submissions must be made by Friday 25 February
2011. We would be pleased to discuss further with you or
assist in the preparation of any submissions.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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