The classification as a sophisticated investor removes a great deal of adviser compliance activity and paperwork. It also means that the investor’s consumer protections exclude action by the Australian Financial Complaints Authority and the Compensation Scheme of Last Resort.

The Sophisticated Investor qualification rules have been the subject of much discussion over the years. How the current rules should be changed and how they should be applied was investigated by the Parliamentary Joint Committee on Corporations and Financial Services inquiry in March 2024. After a year of intense deliberation, the inquiry recommended that

1. the government consider establishing a mechanism to hold periodic reviews of the operations of the test and that
2. subject to stakeholder consultation, the government should amend the Corporations Act to remove “subjective elements” of the sophisticated investor test to introduce objective criteria relating to the knowledge and experience of the investor.

Effectively, the findings of the review were to have a review.

The individual wealth and product value tests are $2.5 million for the assets test, $250,000 for the income test as well as a $500,000 product value test threshold but there has been confusion regarding how this is applied to SMSF members. Superannuation fund trustees must satisfy a $10 million test and, though this would seem to have been designed with APRA funds in mind, also applies to SMSFs.

AFCA Determination 12-00-923475, which is a good read, has given us a clear idea of how this matter will be assessed, at least as far as AFCA is concerned.

The case involved a sole member corporate trustee. The member, individually, passed the sophisticated investor $2.5 million test but his SMSF did not pass the $10 million test. It was on this basis that AFCA heard the claim for losses on foreign exchange trading and determined that the loss would not have occurred if the respondents had not made the investment in the first place. In doing so they confirmed that the fund’s assets are assessed based on the total combined balance of all members but does not include a member’s personal worth.

Interestingly, compensation was partially apportioned against the complainant as he had significant knowledge of the risks. “Mr H has presented as having considerable foreign exchange trading experience, despite protestations to the contrary.  He must be taken to understand the very significant risks associated with margin fx trading with 1,000:1 leverage.” It must be frustrating to advisers that a person, who seems to be a sophisticated investor in a practical sense, has been successful in making a claim based on rules which were created to identify such a person but, due to their inadequate nature, did not.