The world of financial services is rarely static. Changes may be thrust upon us whether we want them or not — and that can be both exciting and daunting. The challenge is to be prepared without wasting time, particularly on shifts that may never come to fruition, and to avoid spending too much money upfront. After all, you don’t yet know where you’ll get the best bang for your buck.

As an Australian Financial Services Licence (AFSL) holder, you understand the importance of staying ahead of the curve, particularly when it comes to regulatory adjustments. But how can you be prepared when you don’t know what to prepare for?

Currently, the Australian Treasury is considering potential changes to the Retail/Wholesale client definitions, which have remained unchanged since their implementation in 2002. While the specifics are not defined yet, proactive measures can ensure your AFSL is prepared for any eventuality.


Why definitions — and changes — matter

While the Treasury consultation paper, Review of the Regulatory Framework for Managed Investment Schemes, is specific to Managed Investment Schemes, the considerations in Chapter 1 of the paper around Wholesale Client Definitions impact all financial services, and specifically AFS Licensees.

The Corporations Act 2001 distinguished between retail, wholesale, sophisticated and professional investors. The Financial Services Reform Act 2001 provided further clarification on the difference between retail and wholesale clients, which has not changed since its introduction. However, protections and limitations in this area haven’t been sufficient: Clients without the necessary experience have been able to access complex financial products on the wholesale market.

These are not the only complications that have arisen since 2001, but they prove that the Treasury has an ongoing responsibility to review and improve its definitions (and the frameworks that guide them). For AFSL holders, this means participating in a game where the rules and even the players themselves can shift significantly — and that doesn’t just impact your workflows, client relationships and competitive edge. It’s your responsibility to stay on top of these and other changes, understanding how each impacts your regulatory compliance obligations. Perhaps unsurprisingly, the potential upcoming changes are no exception.


Uncharted territory: Understanding the potential landscape

While the context was specific to Managed Investment Schemes, the outcomes will impact all Retail and Wholesale clients. Treasury has revealed some potential avenues for exploration:

  • Increased Product Value Threshold: This option proposes raising the minimum financial product value required for a client to be classified as wholesale.
  • Individual Wealth Test Revisions: This could involve raising the current thresholds for net assets and gross income or even excluding specific assets, such as primary residences, from the assessment.
  • Client Consent: There could be a mandatory requirement for clients to explicitly consent to the implications of not being classified as retail.
  • Sophisticated Investor Test Enhancements: This might entail mandating consent from sophisticated investors or requiring evidence demonstrating they meet the qualifying criteria.

Keep in mind that the final details are yet to be released. As such, everything from the nature of the changes to the specific numbers and thresholds could still change — yet another reason AFSL holders must always stay alert and ready to shift gears.


The power of proactive preparation

While the precise nature of the modifications remains to be seen, you can still take pre-emptive steps to ensure your AFSL is well-positioned:

1. Deep dive into existing regulations

Start by thoroughly reviewing the current sophisticated investor tests outlined in Section 761G of the Corporations Act. Understand the various categories and the corresponding thresholds used to classify clients.

2. Leverage your client data

The information you possess about your clients is invaluable. Analyse this data proactively — don’t wait for potential changes to disrupt your business. Identify areas where minor adjustments can be made now to future-proof your operations.

3. Identify potential impact areas

Assess which of the proposed options, if implemented, could have the most significant impact on your business. Consider:

  • Client Distribution by Wholesale Category: Analyse how many clients fall within each existing wholesale category, such as product value, individual wealth, small business, professional investor and sophisticated investor.
  • Primary Residence Impact: Determine how many wholesale clients only meet the criteria by including their primary residence value. A small number suggests minimal impact to your current business, while a significant portion may necessitate reviewing onboarding practices.
  • Sophisticated Investor Test Considerations: If your business heavily relies on the 761G(7)(c) test for classifying “sophisticated” investors, evaluate the potential impact of requiring consent or demonstrating financial literacy.

4. Model scenarios with increased thresholds

Utilise client data to model scenarios with potential increases in thresholds. This helps identify areas where your business might face the most significant impact, allowing you to develop appropriate strategies.



Remember: By analysing your data and understanding the potential changes, you can stay ahead of the curve without wasting resources on unnecessary endeavours. Embrace a proactive approach and be prepared to navigate the future with confidence, regardless of the final decisions made by the Treasury.

Need help making it happen? Contact MIntegrity today for support with all your compliance needs.

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