The Australian Securities and Investments Commission (ASIC) has warned research report providers that it will consider specific legal reform if standards do not improve.
The regulator this week released updated policy guidance it expects to improve the quality and reliability of research reports and to complement reforms under the Future of Financial Advice (FoFA) legislation.
The latest version of Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79) also warns that compliance with the guidance will be monitored through targeted surveillance of research report providers.
“In recent times, there have been serious concerns about the quality of research issued by research providers, particularly in light of various investments failures that had been rated highly,” said ASIC Commissioner, Peter Kell.
“Research report providers are important gatekeepers in the financial services industry, standing between product issuers and the investors who purchase investment products either directly, through advisers or through their super fund.
“It is particularly important for research providers to manage conflicts of interest that may affect the ultimate research rating.”
Corrosive conflict
Research house Lonsec believes the guidance will further support efforts to improve confidence in the independence and quality of research.
Amanda Gillespie (right), CEO Lonsec Research, welcomed the release of the findings, particularly ASIC’s acknowledgement that it will not require avoidance of conflicts of interest associated with direct payments from product issuers to research houses.
“It is pleasing that ASIC has acknowledged that indirect conflicts can be as potentially corrosive as direct conflicts to the integrity of the research and that it will not require the latter to be banned,” she said.
The updated guidance highlights the fact that conflicts arising from cross subsidisation activities and indirect payments from product issuers to Research Houses share the potential to negatively affect the independence and integrity of the overall research process.
Unlike direct conflicts, these conflicts can be far less transparent and in ASIC’s words “not be as readily apparent to a user of the research”.
“In actual practice, the conflicts that are associated with direct payments are more transparently managed, and audited for compliance, than indirect payments,” Gillespie said.
“Indirect payments often involve convoluted cross business subsidies, and indirect product issuer derived revenue streams. In comparison, the most obvious conflict of direct payments from product issuers is less distorting and more manageable than the conflict inherent in indirect payments.”
Advice chain activism
Lonsec also welcomes ASIC’s decision that indirect payments be subject to the same disclosure requirements as direct payments from product issuers.
“It is important that all participants in the advice chain play their part in ensuring investors make well informed investment decisions,” said Gillespie.
“Advisers have been subject to FoFA reforms and it is entirely appropriate that research houses are now accountable to the outcomes of this review.”
Van Eyk CEO Mark Thomas (right) said the research house supported the regulator’s attempts to strengthen the integrity of the research process.
“In particular, we are pleased that ASIC has recognised that research which is paid for by the product issuer requires a particularly high level of disclosure and that that arrangement should preferably be disclosed on the front cover of the research report,” he told Professional Planner Online.
“We are also pleased that ASIC understands that research houses can have varied sources of revenue and that conflicts of interest which may arise from these can be effectively managed in accordance with the revised guidelines.”
A measured approach
ASIC expects research providers to give clients or subscribers information to help them understand the research service. This includes the:
- methodology applied and any limitations that apply to it;
- process by which products are selected for coverage and filters applied; and
- spread of ratings (how many products or what percentage each type of rating received over the past year, for example).
While generally taking a measured approach, ASIC will back-up the reforms with targeted surveillances of research report providers to assess compliance with this updated guidance, measuring both broad compliance as well discrete issues such as conflicts management.
‘If standards do not improve, ASIC will revisit the regulation of research report providers and consider whether specific law reform is needed’, said Kell.
