The Parliamentary Joint Committee on Corporations and Financial Services (Committee) has recommended that the wholesale client test (as described below) remain unchanged and we expect the Australian Government will accept this recommendation.
Separately, the Committee recommended that a more objective test be introduced for the current sophisticated investor test – where a product issuer satisfies itself that the investor meets certain requirements (described in more detail below) and therefore that the investor does not need to be treated as a retail client.
A full copy of the report tabled by the Committee on 13 February 2025 is available.
We are monitoring developments and will share updates as any changes are announced.
What are the wholesale client tests?
In respect of most financial products (including interests in managed investment schemes), an investor is a wholesale client within the meaning of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act) where:
the price of the investment is at least AUD$500,000 (Product Value Test);
the investor can provide evidence (in the form of a certificate issued to the investor in the last 24 months by a qualified accountant) of having either AUD$2.5 million in net assets or AUD$250,000 in annual income for the past two years (Individual Wealth Test); or
the Australian financial services (AFS) licensee provides a written statement that is signed by the investor confirming that, in the AFS licensee’s reasonable view, the investor has the experience to assess and understand the merit, value and risks of the financial product (Sophisticated Investor Test).
Companies or trusts will be deemed to be wholesale clients if they are controlled by individuals who meet one of the wholesale client tests. For completeness, there are other tests used to determine whether an investor is a wholesale client under Chapter 7 of the Corporations Act, however, these were not the subject of the review by the Committee.
Why is this significant?
The relevance of these thresholds is significant:
For fund managers, the distinction between wholesale and retail clients dictates the types of investors they can raise capital from under their AFS licence and the regulatory measures that they need to comply with when providing financial products or financial services. This includes whether they need to comply with the product disclosure statement regime and the design and distribution obligations.
For investors, the distinction presents itself in the form of the number and type of regulatory safeguards that are afforded them as well as the type of financial products and services available to them (with asset classes such as private equity and venture capital traditionally not being made available to retail clients).
Why was the inquiry called?
The Committee’s inquiry was prompted by concerns about the appropriateness of the current financial thresholds that determine whether an individual or entity is classified as a wholesale client or retail client. This is particularly important, as these thresholds were first introduced in 2001 and have not been adjusted for inflation since. The report noted that 1.9% of Australia’s adult population qualified as a wholesale client in 2001 but that as of 2024 this figure has grown to 18% due to the lack of inflation adjustments. By 2041, this is projected to increase to 43.6% of Australia’s adult population.
Key findings
The Committee received a broad range of submissions. Some stakeholders, including Australian Securities and Investments Commission, supported increasing the thresholds to restore the original policy intent and better protect less sophisticated investors. Others argued that the increase in eligible wholesale clients reflects greater financial sophistication in the population and that there is insufficient evidence of harm to justify raising the thresholds.
The Committee recommended the following:
There be no immediate increase to the financial thresholds that apply to the Product Value Test and the Individual Wealth Test, citing a lack of compelling evidence of harm and significant potential negative consequences.
The Australian Government should establish a mechanism for the periodic review of the operation of the wholesale investor and client tests - with mandatory industry consultation to ensure any future changes are evidence-based and appropriately targeted.
The Corporations Act be amended to remove the subjective elements of the Sophisticated Investor Test and introduce objective criteria relating to the knowledge and experience of the investor. This change is intended to mitigate the risk of potential conflicts of interests and exposure to challenges by investors or disputes at the Australian Financial Complaints Authority. Submissions received by the Committee suggested the introduction of a financial literacy test to provide a more accurate and fair means of applying this concept.
International cautionary tale
In 2023, the inflation-driven increases of the income threshold from £100,000 to £170,000 and the assets threshold from £250,000 to £430,000 for the wholesale investor and client tests in the United Kingdom were unwound as they significantly reduced the pool of eligible investors, negatively affecting investment in start-ups and early-stage venture capital funds.
Next steps
We expect the Australian Government to accept the Committee’s recommendations for the thresholds. Hon Stephen Jones, the former Assistant Treasurer, who was co-ordinating this review is no longer in parliament and the new Assistant Treasurer, Hon Dr Daniel Mulino MP, and Hon Dr Jim Chalmers MP have not indicated their views on these outcomes. The reality is that the Australian Government is invested in several initiatives and refining these tests do not appear to be a priority.
The topic of wholesale client thresholds was also the subject of Treasury’s consultation paper titled Review of the regulatory framework for managed investment schemes. The Committee’s recommendations may potentially be dealt with as part of the overarching update to the regulatory regime that applies to managed investment schemes.