Financial advisers must undertake their own critical evaluation of research reports, even if this function has been outsourced to a research house, or face censure and potentially further regulatory action and even further legal reform across the sector.
Released to little fanfare late last week, the Parliamentary Joint Committee on Corporations and Financial Services’ Statutory Oversight of the Australian Securities and Investments Commission: the role of gatekeepers in Australia’s financial services system looks at various gatekeepers in financial services and the Australian Securities and Investments Commission’s effectiveness in regulating them.
The report stems from a public hearing the PJC held on June 21 at the New South Wales State Library in Sydney. This took the form of a roundtable comprising representatives from gatekeepers including financial planners, research houses, custodians, trustees, responsible entities and auditors. According to the PJC, two representatives were selected from each sector in order to gain the views of gatekeepers that operate in a range of ways.
For example, Lonsec Research and van Eyk Research fund their work via markedly different business models; and Dixon Advisory operates as a financial advisory business whereas Macquarie Group operates at many levels as a provider of banking services, financial products, and financial advisory services.
Peter Kell, Greg Tanzer, Calissa Aldridge and Cathie Armour represented ASIC at the hearing.
Building standards
The roundtable was arranged to not only give the PJC a chance to hear what ASIC has done to ensure raised standards in these groups, but to gauge industry reaction to numerous regulator consultations and regulatory changes since Trio.
In a submission to the Trio inquiry, ASIC stated that the government might consider banning payments by issuers to research houses for research and the PJC was interested to hear what had caused the regulator to change its position in a recent regulatory guide on research report providers.
Peter Kell said the response to ASIC Consultation Paper 171 on strengthening the regulation of research-report providers (including research houses), released in November 2012, had been enlightening.
“In response to our questions on the conflicts associated with issuer pays research, most respondents considered that this conflict could be managed with robust processes and appropriate controls,” he said.
“Many also noted that that there was a range of other business model conflicts that can have similarly adverse impacts on the quality, integrity and reliability of the research. Some respondents also noted that requiring avoidance of this conflict may have an adverse impact on the availability of research in the current market.”
However, Kell added, the regulator was committed to conducting targeted surveillance of research-report providers to assess compliance with its updated guidance, measuring both broad compliance as well as discrete issues such as conflict management.
“We have given a clear signal to industry that if standards do not improve, we will revisit the regulation of research-report providers to consider whether specific law reform is needed,” he said.
“Further, we have also said to industry that if as an outcome of our surveillance activity, conflicts of interest for example, are not being managed appropriately, we will take regulatory action and, if necessary, revisit the need to suggest law reform in relation to this sector.”
More skin in the game
At the ASIC Annual Forum in April this year, some participants expressed a desire to see research houses have more “skin in the game” and face greater accountability for the quality of their research.
Kell believes it is a commercial imperative for research providers to deliver research services that their clients can have confidence in.
“The changes we have made to our policy to improve the quality of investment research in RG 79, which comes into effect on September 1, 2013, are designed to assist wholesale clients, such as advisory businesses, to do their own due diligence on potential third party service providers such as research providers,” he said.
“Where the service offering is not of good quality or where conflicts of interest are not effectively managed, we expect purchasers of research services to vote with their feet and choose alternative providers who can deliver quality, reliable services. In releasing our updated guidance for research providers, we clearly communicated our expectation that research providers needed to lift their game.”
A van Eyk spokesperson said the company welcomed the committee’s recognition of the important role of research houses in the provision of quality advice by financial planners.
“We support the committee’s view that research houses should be focused on the needs of the end users of their research and that if there are conflicts of interest they should be fully and prominently disclosed. We support statements by ASIC to the committee that, when assessing investment research, financial advisers should take into consideration the selection process for the products that were rated and the spread of ratings.
“We think this can be a useful guide to the quality of the ratings and the research on which they are based. We also agree with the committee that the “issuer pays” business model for research houses is a concern and we think this area should be the focus of efforts to improve disclosure to financial planners.”
But financial planners pay research houses for the time and expertise that is involved in producing a research report into a fund or product. To what extent does ASIC then expect financial planners to undertake their own critical evaluations of a research report?
“We expect advice providers to make inquiries and research the products they give advice on,” said Kell. “Where they use research, we expect them to conduct due diligence on research-report providers that they intend to use and our updated guidance in RG 79 will help them to do this.
“Regardless of their use of third-party service providers such as research providers, the advice provider remains responsible to the client for the advice they give.”
To read the full report, click here.
