Regulator takes tougher stance on financial advice

RESEARCH houses will have to keep their advice free from commercial influence and reveal more about how they come to their conclusions on 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, which cost investors hundreds of millions of dollars.

Research houses are the latest set of "gatekeepers" to be tackled by new ASIC chairman Greg Medcraft, who yesterday 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.

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.

He said 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. It's actually about trying to lift the veil," he said.

"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 that 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 that 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".

"Investors must have confidence that the information they are basing decisions upon is not only accurate but also unbiased," she said.

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Frequently Asked Questions about this Article…

What are ASIC’s proposed new rules for research houses and investment research transparency?

ASIC’s consultation paper proposes rules that would require research houses to keep advice free from commercial influence, publish their methodologies, be very clear about who pays for the research, and manage or disclose conflicts of interest. The aim is to bring research houses into the same regulatory net that already covers equity analysts at stockbrokers and merchant banks.

Why is the corporate watchdog targeting research houses now?

ASIC says the move responds to past cases where research-house approvals coincided with major investment failures (including Westpoint, Fincorp, Bridgecorp and Basis Capital) that cost investors hundreds of millions. Its review also found payments from fund managers to research houses to rate products as one of the most serious conflicts of interest.

What is ‘payment for ratings’ and will ASIC ban this practice?

‘Payment for ratings’ refers to fund managers paying research houses to rate or review their products. ASIC has said it opposes the payment-for-ratings business model, but it stopped short of banning it in the consultation paper because it does not currently have the power to impose an outright ban.

How will more transparency from research houses help everyday investors?

By publishing methodologies and clearly disclosing who pays for research, investors can better understand how conclusions are reached and judge whether advice is unbiased. ASIC and industry groups say this transparency should help investors make more informed decisions and have greater confidence in the information they rely on.

Do research houses already disclose who pays them or how much they are paid?

Disclosure practices vary. For example, Lonsec’s managing director said the firm discloses everything it currently does but does not disclose the size of fees it receives. Morningstar Australia’s CEO noted Morningstar does not charge providers to review products. The proposed rules would push for clearer, consistent disclosure across the industry.

What should I look for when evaluating an investment research report?

Look for a clear methodology (how recommendations are reached), explicit disclosure of who paid for the research, any declared conflicts of interest, and transparent assumptions. ASIC’s paper stresses that managing and disclosing conflicts is essential so investors can judge the credibility of a report.

Will ASIC review other gatekeepers like comparison websites as well?

Yes. ASIC chairman Greg Medcraft said a review of websites that compare products such as home loans and insurance is likely to be next, because these sites are also important ‘gatekeepers’ for consumers and investors.

How has the industry reacted to ASIC’s consultation on research house rules?

Industry reactions quoted in the article were generally constructive: Lonsec’s managing director said his firm appeared to be in a good position to comply; Morningstar Australia’s CEO described the paper as “a good document” and not particularly onerous; and the head of the Australian Institute of Superannuation Trustees called ASIC’s move “a welcome initiative.”