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Insights / May 2nd, 2024

Who will be a wholesale client in 2025?

Consultation on the wholesale client test continues, with the Parliamentary Joint Committee on Corporations and Financial Services now calling for written submissions.

As Treasury “continues to consider the feedback” that it received during its consultation last year, the question of what to do about the wholesale client test has been picked up by the Parliamentary Joint Committee on Corporations and Financial Services (“Committee”), who are calling for written submissions by 15 May 2024.

The impact of any change could be significant for product issuers and fund managers who cater to the wholesale market, by reducing the pool of wholesale investors and increasing compliance.

The focus of the debate is largely on increasing the thresholds for the financial tests in 761G(7) of the Corporations Act. At present, if a client provides an accountant’s certificate certifying that they have net assets of at least $2.5 million or if, for the past two financial years, they have earned a gross income of $250,000 they will be a wholesale client. A client will also be a wholesale client if they invest $500,000 or more in a financial product.

The thresholds have not been increased in over 20 years. In that time, the CPI has increased by approximately 83%. Treasury has also cited figures that:

  • it is estimated that, “in 2021, 16 per cent of Australian adults met the individual wealth thresholds to be classified as a wholesale client, compared to 2 per cent of Australian adults in 2002”; and

  • it is predicted that, “under the current thresholds, the percentage of Australian adults above the threshold will increase to 29 per cent by 2031 and 44 per cent by 2041”.

The changes under consideration arise in part because of the issue at the heart of the assets/income test. Wealth is an imperfect proxy for financial sophistication – an investor can be inflated above the $2.5m threshold by virtue of a windfall or by an inflating housing market. This gives rise to the concern that some wholesale clients above the thresholds are not financially literate and therefore are materially at risk without retail client protections.

There are also concerns with the $500,000 investment test – that could be a client’s entire investment balance and therefore exposes the client to significant concentration risk.

It is likely that the way forward is that the thresholds will be increased and a mechanism for increasing the thresholds in line with inflation will be introduced. An alternative (or additional measure) would be to excludethe family home from the assets test. These are probably the simplest levers to pull. Either alternative would reduce the pool of available wholesale investors – for some fund managers, this could have a material impact on their available investor base.

Some proposals have been made that would require additional processes for qualifying investors as wholesale, which would likely involve additional disclosure, and increased compliance obligations for wholesale-only investments.

Any alternative change that would require product issuers to assess investors’ sophistication is fraught with difficulty – it would result in inefficiency in the investment process due to the additional compliance burden and would expose a product issuer to significant risk if an investor were to later challenge the product issuer’s assessment.

At the same time, the retail regime is increasingly onerous and many wholesale-only funds cannot be viably registered without materially increasing costs (impacting returns to investors).

With two rounds of consultation and no indication of a firm policy position from Government, the timeframe for any changes is as uncertain as those changes themselves.

Any change is likely to significantly challenge a sector of the market, however without a clear policy position it will remain difficult for wholesale-only funds to position themselves for future changes.

It should be noted that the thresholds referred to here do not apply to superannuation products, retirement savings accounts or general insurance products - alternative tests apply in those circumstances.

If you have any questions about Treasury’s review, the Committee’s inquiry or the current wholesale client tests, please get in touch with Cowell Clarke’s Financial Services team by contacting Richard Hopkin, Emma Johnson or Zac Mizgalski.


This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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