ASIC targets research houses

RESEARCH houses will have to keep their advice free from commercial influence and reveal more about how they come to their conclusions about investment products under new rules proposed by the corporate watchdog.

By InvestSMART · 17 Nov 2011

By InvestSMART ·
17 Nov 2011

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The Australian Securities and Investments Commission's proposed new rules are a response to the ticks of approval research houses gave to a string of investment debacles, including Westpoint, Fincorp, Bridgecorp and Basis Capital, that cost investors hundreds of millions of dollars.

Research houses are the latest "gatekeepers" to be tackled by new ASIC chairman Greg Medcraft, who said a review of websites that compare products such as home loans and insurance was likely to be next.

"They are gatekeepers and very popular, and we have said we will hold gatekeepers to account," he said yesterday.

In a consultation paper issued yesterday, ASIC said the payments fund managers make to research houses to rate their investment products was "the most serious conflict of interest" identified during its research of the industry.

Mr Medcraft said that while the watchdog was opposed to the payment-for-ratings business model, it stopped short of banning the practice because it lacked the power to do so.

The new rules for research houses aimed to bring them into the same regulatory net that already catches equity analysts at stockbrokers and merchant banks.

"One of the other things we're asking them to do is publish their methodologies," he said. "It's actually about trying to lift the veil. The other thing we're asking is that they actually be very clear on who pays for the research.

"We're talking about managing conflicts, disclosing conflicts. It's absolutely essential that investors understand and can make a judgment on the report they're reading."

He said ASIC had learnt from the global financial crisis, but would not be drawn on whether regulation before the crisis was up to the job.

Craig Semmens, the managing director of research house and stockbroker Lonsec, which accepts fees from fund managers to rate products. said that on a first reading of ASIC's paper his company was "in a good position to comply".

"We disclose everything that we do now," he said. "What we don't disclose is the [size of] fees that we receive."

He said he did not know if the new rules meant Lonsec would have to disclose how much it received from fund managers for rating their products.

Anthony Serhan, the chief executive of Morningstar Australia, which does not charge providers to review products, said ASIC's consultation paper was "a good document". "I don't think it looks particularly onerous," he said.

The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, said ASIC's move was "a welcome initiative".

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Frequently Asked Questions about this Article…

What are ASIC's proposed rules for research houses and how will they affect investment research?

ASIC's consultation paper proposes rules to make research houses keep advice free from commercial influence, publish their research methodologies, disclose who pays for research, and manage conflicts of interest. The aim is to lift the veil on how ratings and reports are produced so investors can better judge the advice they read.

Why is ASIC targeting research houses now?

ASIC says the move responds to past investment failures where research houses gave approval ticks that preceded large investor losses — examples cited include Westpoint, Fincorp, Bridgecorp and Basis Capital. New ASIC chair Greg Medcraft has also flagged gatekeepers, like research houses, for greater accountability.

Does ASIC want to ban payment‑for‑ratings by research houses?

ASIC has said it is opposed to the payment‑for‑ratings business model and identified payments from fund managers as the most serious conflict of interest. However, the consultation paper stopped short of an outright ban because ASIC says it currently lacks the power to ban the practice.

How will the proposed rules help everyday investors spot conflicts of interest?

By requiring research houses to disclose who pays for research and to publish their methodologies, ASIC aims to make conflicts more visible. That transparency should help investors understand potential commercial influences and make an informed judgment about the reliability of a report or rating.

Do research houses already disclose fees and conflicts — how have firms responded?

Responses vary. Lonsec’s managing director Craig Semmens said Lonsec already discloses everything it does now but does not disclose the exact size of fees received, and he believes Lonsec is well placed to comply. Morningstar Australia’s CEO Anthony Serhan noted Morningstar does not charge providers to review products and called the paper 'a good document'.

Will the new rules bring research houses into the same rules as equity analysts?

Yes. ASIC’s proposals aim to bring research houses into the same regulatory net that already covers equity analysts at stockbrokers and merchant banks — including requirements on managing and disclosing conflicts and being transparent about methods.

What other gatekeepers or services did ASIC say it might review next?

Greg Medcraft said ASIC is likely to review websites that compare products such as home loans and insurance next, indicating the regulator wants to scrutinise other popular 'gatekeepers' for potential conflicts and transparency issues.

What practical steps can everyday investors take now when using research house ratings or reports?

Look for clear disclosures in reports: who paid for the research, the methodology used, and any declared conflicts of interest. Be sceptical of paid‑for ratings, compare independent providers (some, like Morningstar Australia, don't charge providers), and use the transparency information to make your own judgement about a product before investing.