Licensees: Quiz your research house

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Time’s up for research providers to improve the quality and transparency of their research reports.

In December, ASIC gave research providers until 1 September 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.

ASIC is now encouraging licensees to quiz their research provider to ensure they’re providing quality research.

The regulator says that advice providers should ask questions about research providers’ business model, their conflicts of interest and how they product ratings.

“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,” sayid ASIC Deputy Chairman Peter Kell.

“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.”

ASIC has provided a list of questions that licensees should ask their research providers:

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?

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