ASIC today released a consultation paper 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.

Comments on the consultation paper are due by 3 February 2012.

Download the consultation paper

Background

The Parliamentary Joint Committee on Corporations and Financial Services has conducted a number of inquiries that are relevant to the research houses and rating sectors.

In June 2011, the Parliamentary Joint Committee on Corporations and Financial Services decided to: 'inquire into the collapse of Trio Capital, and report by 24 November 2011, into the collapse of Trio Capital and any other related matters, with particular reference to: ... 10. the role of ratings agencies and research organisations in product promotion and confidence'.

ASIC lodged its submission to and appeared at hearings of the Inquiry in September 2011.

Download ASIC’s submission to the Parliamentary Joint Committee (AHP website)

CP 171 does not make any proposals concerning the comparison site sector. ASIC is considering a separate review of industry practices in this sector in the near future. This would include looking at whether there are quality, disclosure and conflicts of interest issues in research and comparison services relating to non-investment products (e.g. comparison websites covering general insurance, banking and consumer credit products).