Financial advisers must undertake their own critical evaluation of research reports, even if this function has been outsourced to a research house, or face potentially further regulatory action and even further legal reform across the sector, according to a new government report.
Released in August, the Parliamentary Joint Committee on Corporations and Financial Services report, Statutory Oversight of the Australian Securities and Investments Commission: the role of gatekeepers in Australia’s financial services system, looks at the various gatekeepers in the financial services system and ASIC’s effectiveness in regulating them.
The report stems from a public hearing the committee held on June 21 at the New South Wales State Library in Sydney. This took the form of a round table comprising representatives from gatekeepers in the financial services system, including financial planners, research houses, custodians, trustees, responsible entities (REs) and auditors.
ASIC’s Peter Kell, Greg Tanzer, Calissa Aldridge and Cathie Armour attended the meeting.
Gatekeepers such as Lonsec Research have previously acknowledged that the financial services system has historically been lightly regulated. Lonsec observed that the regulator has outsourced significant elements of the gatekeeper function to the private sector, and that ASIC’s role is to hold the gatekeepers to account.
However, the collapse of Trio Capital Limited has led to far greater scrutiny of the role of gatekeepers in Australia’s financial services system and investors’ expectations of that role.
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 committee 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 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 that 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 conflicts management.
