Episode Details

The Corporations Act makes a distinction between wholesale and retail clients. It is assumed that wholesale clients have a sufficient level of financial literacy to self-assess the appropriateness and risks of various investment products and to protect this own interests. As such, there are fewer disclosure obligations (and lower compliance costs) for financial services businesses working with wholesale clients.

It is my contention that similar provisions should be available to banks and mortgage brokers. Often, the way you assess an application for a borrower with a net worth of $2,000 compared to a borrower with $20 million will vary. Making this distinction allow lenders to apply a more common sense approach. However, unfortunately, no such distinction exists. All borrowers are subject to the same rules, irrespective of their financial position and financial literacy.

Retail versus wholesale investor rules

The Corporations Act makes a distinction between wholesale and retail clients (or “sophisticated investors” if being offered bonds or direct shares). A wholesale client is someone that meets either of the below two tests:

1. Asset test – having a net worth of over $2.5 million; or

2. Income test – having a pre-tax income of at least $250,000 in each of the past two years.

The Act also includes other exemptions in addition to the above including professional investor test, product value test and small business test.

These asset and income hurdles were struck back in 1991 and are now vastly outdated. Adjusting for the impact of inflation, the income threshold should now be over $490,000 and asset value over $4.9 million.

Wholesale clients are assumed to be financially savvy enough to make informed decisions and are able to protect their own interests. In short, they can decide whether an investment is appropriate so there’s less onus on the provider or advisor. Also, there are fewer obligations (on financial advisors and product issuers) when dealing with wholesale clients such as there is no need to provide a Financial Services Guide, Statement of Advice, Product Disclosure Statements, etc.

Wholesale clients are often required to confirm their status by providing a certificate from a qualified accountant.

Responsible lending rules may not be changed as planned

In September last year, the government announced that it would seek to wind back some of the responsible lending rules which I discussed here. The main proposed change was to relax the obligation for the bank to verify how much you spend (and on what items) when applying for a loan.

The Bill passed the House of Representatives in March 2021 and is currently before the Senate. It is being opposed by the Australian Labor Party, the Australian Greens and some consumer groups. However, the government has reaffirmed its intention to push this legislation through. I understand that the Bill is scheduled for a second reading next week (16 June 2021). If this Bill doesn’t succeed, there’s an even greater need for sophisticated borrowers to be recognised.

Problems with a one-size-fits-all approach

A one-size-fits-all approach to assessing loans creates some perverse and frustrating outcomes. I share two c