- The Financial Services Council (FSC) recommends doubling the threshold under which consumers are identified as ‘retail clients’ to those with assets of less than $5 million
- The FSC says this change in the definition of retail and wholesale clients will bring an extra 275,300 clients within the consumer protection framework of retail investors
- The other tests should remain unchanged, according to FSC, including the $250,000 income threshold
- FSC CEO Sally Loane says it is time the government modernised the current “complex and costly regulatory framework” to respect the judgement of advisors
The Financial Services Council (FSC) has today released a White Paper recommending the doubling of the ‘retail client’ threshold to those investors with assets of less than $5 million.
The body for life insurance and funds management industries also recommended the threshold be indexed against household inflation.
Under the Corporations Act, retail investors are those with under $2.5 million in assets. Wholesale clients are those with more than $2.5 million and professional investors have assets of over $10 million.
The benchmarks for satisfying the needs of a wholesale client are based on statistics from 1991. The FSC states that wealth transfer and rising property prices since then have increased the proportion of consumers who qualify as wholesale investors.
The FSC is therefore worried that the consumer protection framework for financial advice is failing to safeguard a growing number of customers.
According to the FSC, the proposed change in the definition of retail and wholesale clients will bring an extra 275,300 clients within the consumer protection framework of retail investors.
The other tests should remain unchanged, according to FSC, including the $250,000 income threshold.
The recommendation follows research from the Australian National University which, as reported in the Australian Financial Review, shows that the number of sophisticated investors over the past 20 years has ballooned from 104,000 in 2002 to more than 3 million.
FSC CEO Sally Loane said it was time the government modernised the current “complex and costly regulatory framework” to respect the judgement of advisors.
“Current regulations prescribe compliance obligations at every step of the advice process,” she said. “They are an unprecedented driver of cost for financial advisers and consumers, and are past their use-by date.”
Also on the FSC’s radar is abolishing Safe Harbour steps for complying with the Best Interests Duty as well as Statements of Advice, to be replaced by a “simpler, consumer-focused” Letter of Advice.
The FSC commissioned KPMG to undertake this analysis and said the recommendations would reduce the cost of providing advice as well as free up more time for advisors.
The KPMG analysis said the FSC key recommendations would reduce the cost of providing financial advice per client from $5334 to $3466, and would save financial advisers up to 32 per cent of time when providing advice to clients.
“Long-term the FSC’s reforms could generate cost savings for the advice industry of $91 billion over 20 years,” Ms Loane added.
FSC also recommended a move to self-regulation by 2030 and a severing of the “nexus between financial product and advice, and remove complex labels for different categories of advice”.