With submissions still being considered by the Australian Securities and Investments Commission (ASIC), it is essential that the financial services industry understands the potential ramifications of removing the current pay-for-ratings model of research houses, according to Zenith Investment Partners.
Submissions to ASIC's Consultation Paper 171 – Strengthening the regulation of research report providers (including research houses) – closed in February, but research providers are yet to be provided with any indication of how the regulatory guide will look.
According to John Nicoll, Zenith's national sales manager, key to the proposed guide will be ASIC's decision on the pay for ratings model, which could potentially be a "game changer" for the research houses.
He said if the regulator were to eliminate this model, the quality of fund reviews could fall dramatically.
"Potentially, the research that will be available to the market will be very simple, one page, quantitative driven research that's not going to add much value to financial advisers' businesses," he said.
Nicoll said a drop in the standards of the research process could also see more risky managed funds passing the review process and coming to market than is currently the case.
If ASIC makes the decision to completely cut the pay-for-ratings model, it needs to take into account every form of subsidy that a fund manager provides a research provider, including sponsorship and payment for data, he said.
"I think once ASIC looks a bit deeper – and they already are – they will realise most research houses are really tight when it comes to their review process."
