ASIC to review Wholesale / Sophisticated Investor thresholds

ASIC to review Wholesale / sophisticated investor thresholds  

‍When the Corporations Act 2001 legislation was implemented the median house price in Sydney was $312,000 and the average income was $43,500p.a. So when the parameters were set to define what the managed investment scheme regime refers to as a sophisticated or wholesale investor, they very rightly came up with a person who earns $250,000p.a. for 2 consecutive years, or with net assets exceeding $2,500,000 or investing a minimum of $500,000. 

Let’s jump forward 24 years to 2025 and the average income is now $100,000p.a., the median Sydney house price is $1,486,000 and AFSL Licenced responsible entities can make a self determination as to whether a prospective investor is a sophisticated investor or not. As most new AFSL entrants hold wholesale licences so are only allowed to deal with sophisticated investors, that last judgement call is a little too easy to become conflicted when trying to grow FUM.

As outlined in the article in The Australian (linked below), Ratings House SQM relayed its concerns about ‘a significant increase in the number of wholesale fund product offerings across various asset classes; in particular the private credit sector.’ 

‘It agreed the sophisticated investor test should be set at a higher hurdle.’

Their assessment based on CPI of the original parameters has the 2025 version with an income test at 2 years consecutively earning $470,000p.a. and net assets of $4,700,000. When it costs roughly $3,500,000 to buy a semi in Queens Park or a terrace in Paddington, it’s not too hard to meet the net $2,500,000 threshold currently in place from 2001. 

So basically being a home owner in the Eastern Suburbs and many other suburbs of Sydney makes you a sophisticated investor, even those now retirees that bought their homes for far less than what they are currently worth and have become sophisticated investors by virtue of asset appreciation only. Does owning a home make you a sophisticated investor??

As a retail AFSL holder Sydney Wyde can deal with retail and sophisticated investors and all are treated equally. By dealing with a retail licensee you get greater consumer protections such as dealing with an RE with $5M in PI insurance, who has to be a member of AFCA, has a registered managed investment scheme with a compliance plan and an external compliance committee.

ASIC is on the right track here and once the threshold is raised to protect retail investors, who are mistakenly caught up in the current sophisticated investor definition, the better outcomes will be in play for all investors and consumers. Especially in a fast growing private credit market place.

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Reference article: https://www.theaustralian.com.au/business/asic-tiptoes-around-overreach-concerns-in-private-markets-review/news-story/f58e8961768115b2a5f5efbf8e740e92

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