By Michael Read.

Labor has quietly shelved a controversial proposal to make it harder for retail investors to access risky products such as private equity and unlisted property, amid a fierce backlash from tech start-ups and some fund managers.

Assistant Treasurer and Minister for Financial Services Stephen Jones announced a surprise inquiry into managed investment schemes in October 2022, amid concerns retirees were losing their life savings to strategies they never fully understood.

The most controversial element of the still-continuing review is whether to lift the wealth threshold required to qualify as a “wholesale investor” from its current level of $2.5 million in net assets.

That figure has not increased in more than two decades, meaning the share of the population that qualifies as wholesale investors has increased from 2 per cent in 2002 to 16 per cent.

The increase is largely because the net worth test includes the value of the family home, and nominal property prices have increased by about 290 per cent since 2001.

Sophisticated, or wholesale investors, can legally access complex but often lucrative opportunities, such as in private equity, venture capital, seed rounds for early-stage start-ups and unlisted real estate.

But they also forgo important consumer protections, such as getting financial advice that is free from conflicts, and the right to complain to a government dispute resolution body.

Backlash from fund managers
The government’s preferred direction had been to raise the threshold and to ensure the test criteria would increase at regular intervals, but AFR Weekend has learnt that the changes have been put on ice until at least after the next election, due by May next year.

The prospect of tighter criteria, first reported by The Australian Financial Review in January this year, caused alarm in the start-up community and led Treasury to extend consultation on the review.

Labor has also faced a backlash from some in the fund management industry, such as former Queensland premier Campbell Newman, who is now chairman and managing director of Arcana Capital.

Faced with the pushback and an already busy legislative agenda, Mr Jones has started to publicly play down the possibility of changes to the wholesale investor test.

At a recent Financial Services Council event, he said it was “not the most pressing thing coming down upon the government”.

“I’ll receive the report, and I’ll look at it when it comes across my desk, but it’s not the No. 1 thing that I’m looking at at the moment.”

Mr Jones said his main priority between now and the next election was to make progress on the unfinished financial services proposals on his desk, including increasing the earnings tax on superannuation balances above $3 million.

Call for $5m threshold
There is no guarantee of any changes to the wholesale investor test being passed by the Senate. This month, the Coalition opposed any tightening of the test, warning that it would risk the country being regulated out of growth and innovation.

Wholesale investor financing is vital to the start-up ecosystem. An investor also needs to pass the wholesale test to access certain tax breaks designed to encourage people to put money into start-ups.

The Australian Securities and Investments Commission has called on Mr Jones to raise the threshold to $4.5 million, and the FSC has backed a $5 million figure, drastically reducing the number of Australians who would qualify as sophisticated investors.

Applying Reserve Bank and Treasury income and asset price assumptions, the number of sophisticated investors could reach 29.1 per cent, or 6.78 million adults, by 2031, and 43.6 per cent, or 11.5 million adults, by 2041, according to modelling by Australian National University associate professor Ben Phillips.

ASIC has urged Mr Jones to index the test thresholds to adjust for two decades of inflation.

If Labor were to adopt ASIC’s recommendation, it would result in a net asset threshold of about $4.5 million and a gross income threshold of $450,000.

When Labor was in opposition, Mr Jones had been highly critical of the Morrison government for not making it harder to become a sophisticated investor.

“A tradie who owns a house in Rockdale [in Sydney] shouldn’t be exposed to high-risk financial advice because the government hasn’t fixed the thresholds,” he said in October 2021.


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