Options paper released
In late January, the Treasury released an options paper (www.mcmahonclarke.com/ckfinder/userfiles/files/DM315546.pdf) as part of the future of financial advice reforms requesting feedback and comments for possible options for a new regime for the distinction between wholesale and retails clients.
GFC highlights problems with current regime
According to Treasury, problems with the definition of a wholesale client were exposed during the GFC as, according to Treasury, clients who did not have the necessary experience investing in complex financial products were able to access these on the wholesale market. Treasury specifically cites the example of the Parkes Council investing in collateralised debt obligations sold to it by Lehman Brothers. Because the Parkes Council was a wholesale client, there was no requirement for it to receive a prospectus or product disclosure statement about investing in CDOs. The Parkes Council made a $13.5 million investment in CDOs over two years but claimed it was not made aware of the risks of investing in CDOs.
The current regime
Broadly speaking, a person will be a wholesale client in the following circumstances:
- They invest $500,000 or more in a financial product or service.
- They have $2.5 million in net assets.
- They have $250,000 of gross income over the past two financial years.
- A licensee certifies the person as a "sophisticated investor", based on their investment experience.
Treasury proposes the following four possible options for consideration by the industry:
- Option 1 – retain and update the current system.
- Increase the "gold card" exemption from $500,000 to $1 million.
- Index the existing three wealth and product value threshold tests so they take into account the time value of money.
- Exclude from an investor's net wealth their superannuation and primary residence.
- Investors to explicitly opt-in as a wholesale client even if they meet any of the three wealth and product thresholds.
- Investors meet two out of three of the wealth and product thresholds (as opposed to just one of those thresholds).
- Certain financial products (such as CDOs and CFDs) to be only available to wholesale clients.
- Remove the "sophisticated investor" certification because it is rarely used.
- Option 2 – remove the distinction between wholesale
and retail clients.
- All investors to be treated as retail clients, and so any relaxation of laws for wholesale clients would be removed.
Option 3 – introduce a "sophisticated investor" test as the sole test.
- Arbitrary wealth and product threshold tests to be removed completely.
- Only test is a subjective test based on whether an intermediary is satisfied that a person is wholesale.
- Option 4 – do nothing.
It is unlikely the government will adopt option 4, which is to do nothing. We also consider the outcome of the consultation process is likely to be that the government will adopt option 1 and tinker with the current regime, increasing the thresholds and making it more difficult to qualify as a wholesale client.
What does this mean for you?
It appears the outcome of this consultation process will be that further obligations will be imposed upon financial intermediaries to qualify clients as wholesale clients and the thresholds for meeting the wholesale client test will be increased. Less clients will therefore qualify as "wholesale", and so if your business structures and processes are based on the lower thresholds required for wholesale clients, then you will need to consider reviewing these processes in anticipation that the thresholds will increase.
You will specifically need to consider—
- Australian financial services licensing issues, and whether you will need to vary your licence (to incorporate providing services to retail clients)
- disclosure, and
- future plans for establishing wholesale trusts.
We will be making a submission about the paper (due 25 February 2011), and if you would like to provide any feedback for inclusion in that submission, then please email firstname.lastname@example.org or call 07 3239 2961.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.SETLIVE