Inquiry recommends SIT changes to prevent AFSL abuse
The parliamentary inquiry into the sophisticated investor test (SIT) has recommended making the test less subjective in order to prevent abuse by Australian Financial Services Licensees (AFSLs).
The inquiry into wholesale investor and wholesale client tests began in March 2024 by the Parliamentary Joint Committee on Corporations and Financial Services and released its final report last week.
Under the SIT for either a wholesale investor or a wholesale client, a person may qualify as a wholesale investor or client if an AFSL is satisfied on reasonable grounds that the person has experience in using financial services and investing in financial products that allows them to assess and inform themselves about the merit, value and risks of the product or service.
While some inquiry participants argued that the SIT should be abolished on the basis that it is scarcely used and subjective, others argued that a SIT-style test should be the sole way to distinguish between wholesale and retail clients.
But there was also potential for the SIT to be misused or abused by AFSLs, the final report said, based on submissions it had received.
“The subjective character of the SIT also increases the potential for conflicts of interest given it would generally be in the interests of an AFS product issuer for an investor to be classed as a sophisticated investor and therefore be able to be sold wholesale investment products and services.
“ASIC indicated it was concerned that the subjective nature of the tests ‘may be open to abuse, particularly in relation to complex and novel product offerings’ by AFS licensees.
“The committee also heard that the SIT is difficult for AFS licensees to implement at scale and exposes them to compliance risks.”
In light of the evidence provided, it recommended the government amend the Corporations Act 2001 to remove the subjective elements of the sophisticated investor test and introduce objective criteria relating to the knowledge and experience of the investor.
“The committee therefore considers that the Corporations Act 2001 should be amended to introduce objective criteria to the SIT. This will ensure that potential wholesale investors are not unfairly or arbitrarily excluded from wholesale markets, and thereby promote participation in, and the flow of capital to, Australia’s wholesale markets.”
Separately, the inquiry did not endorse submissions to increase the financial thresholds in these tests and instead recommended the implementation of a mechanism of review.
It recommended “that the government consider establishing a mechanism for periodic review of the operation of the wholesale investor and client tests; and that any such mechanism include mandatory requirements for engagement and consultation with Australia’s investment industry.”
AUTHOR
Laura Dew
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