ASIC reminds licensees giving personal financial product advice that now is the time to quiz their research provider to ensure they are providing quality research.

From 1 September 2013, research report providers need to comply with ASIC’s updated guidance in Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79).

Research is commonly used by advice providers to identify products that may be suitable for their clients and by licensees. Not all research is the same and nor is each research provider.

ASIC strongly encourages all advice providers to test the market for investment research and re-evaluate the product offering of current or prospective third party research providers by asking questions about:

• their business model

• conflicts of interest; and

• how they produce ratings and what they mean.

Licensees and advisers should carefully analyse the responses to these questions before deciding on their research provider and how to use research in their business.

‘Advice providers are responsible to their client for the advice they give and investment research that may highly rate a product is not a ‘green light’ that a product will be suitable for a given client. However, investment research can be an important ingredient in the formulation of quality advice,’ ASIC Deputy Chairman Peter Kell said.

‘To make this assessment, we encourage all advice providers to do their due diligence on their third party research provider to ensure that quality inputs go into their advice businesses.’

Licensee / advice provider checklist

1. Business model and conflicts of interest

• What is the business model and does it give rise to conflicts of interests such as conflicts arising from remuneration practices or ownership structure?

• How are conflicts of interest managed?

• What is the level of experience and turnover among research analysts to the business? Are enough resources allocated to the research task?

2. Production and meaning of ratings

• How are products selected for rating and what do the ratings mean?

• Are products rated on an absolute basis or 'best of breed' basis?

• What are the strengths and limitations of the research methodology applied?

• What is the ratings spread — i.e. the percentage of products that received each type of rating, such as ‘recommended’, ‘neutral’ or ‘not recommended’, over a period of time?

• Is information about the currency of a rating or research history of a product meaningful and accessible?

3. Service offering

• Does the provider give clear information (and updates about) the business, personnel changes and relevant conflicts of interest?

• Is additional information and support available to help you understand and use the research in your business?

• What (if any) quality control measures does the researcher employ e.g. random audits, verification processes or back testing of ratings?

Download

RG 79

Background

ASIC released updated policy guidance in December 2013 (refer: 12-307MR) that gave research providers until 1 September 2013 to implement key changes to their business, and to improve the quality and transparency of the research reports. Providers were required to address:

• management of conflicts of interest, particularly business model conflicts among research report providers

• quality and robustness of the research process including the need to allocate appropriate resources and expertise to the research task

• transparency of the research process including the way products are selected for research, what ratings mean and how they are applied, and

• the ability of users of research to form a view about the quality and reliability of the research.