ASIC Proposals for Research Houses
ASIC released a consultation paper November 16 proposing research report providers, including research houses, separate their business units as a strategy to manage conflicts of interest as part of moves to improve confidence in the independence and quality of research reports.
This proposed segregation would involve strict and formal physical and electronic separation between ancillary business units such as consulting and funds management services and the research business.
A key conflict of interest issue for research report providers is whether providers should accept payment from product issuers to produce research about the issuer’s own products. ASIC is seeking feedback on whether these conflicts of interest associated with product issuers paying for research:
* can be effectively and robustly managed, or
* should be avoided entirely.
Consultation Paper 171 Strengthening the regulation of research report providers (including research houses) (CP 171) also proposes research houses lodge a compliance report every two years.
The biennial report would require research houses to address issues such as research methodology and processes, internal conflicts management procedures, conflicts disclosure to users, and managing research quality and transparency.
ASIC Chairman Greg Medcraft said research report providers are a significant gatekeeper in the market and it is expected they adhere to high standards of conduct.
‘Research can influence which products individual advisers recommend to their clients’, Mr Medcraft said.
‘As such, the quality of research and the conduct of research houses have a material impact on the integrity of the financial planning industry, and the quality of the advice they produce.
‘Research is an important consideration for ASIC in light of our priority to promote confident and informed investors.’
CP 171 follows discussions ASIC had with a select group of research houses, as well as financial planning and advice industry associations and a number of their members. ASIC also held talks with some industry associations representing other research report providers such as the Australian Financial Markets Association (AFMA) and Stockbrokers Association of Australia (SAA).
Key issues identified from ASIC’s review were:
* the incidence (or the perception of) conflict of interests potentially arising through research houses’ revenue model, ancillary businesses and analyst arrangements
* the adequacy of skills and experience of research analysts in producing quality research, and
* the lack of transparency and comparability for research methodology.
ASIC also identified an apparent ‘expectations gap’ between financial advisory firms and research houses about the nature and role of research in its review. In particular, advisers expressed a view that research houses should cover less products and undertake more in-depth research. By contrast, some research houses saw their role as providing product coverage for a range of products in each market segment and identifying the ‘best of breed’ products.