Are there too many ratings houses in Australia?
Last year saw one of the major investment research houses, Standard & Poor’s (S&P), exit the Australian market.
Related: Rate the Raters 2013
But with five companies currently operating in this space, many still consider the Australian investment research space to be rather crowded. The significantly larger United States market, for example, only has three major ratings houses – S&P, Moody and Fitch.
That’s not to say that some Aussie researchers haven’t tried to diversify and/or bring unique offerings to the market.
van Eyk Research, for example, recently boosted its research in asset classes the company believes will add most value to investor portfolios over the coming years, such as the alternatives sector.
However, the biggest challenge this year came from the regulator, as it placed further pressure on researchers to better manage their conflicts of interest.
In its Regulatory Guide (RG) 79, the Australian Securities and Investments Commission (ASIC) set out increased requirements for ratings houses with respect to disclosure of conflicts, transparency, and the quality of the research process.
This means that those research houses who take either direct or indirect payments from fund managers will have to disclose it on the first page of their report.
The requirement was widely welcomed by the industry, and all major researchers claimed they already had compliant systems in place, despite ASIC finding their understanding of the current regulatory policy was limited.
ASIC’s revised approach comes as industry and consumer representatives pushed the regulator in the years since the 2008 market collapse by raising concerns about whether research houses are managing their conflicts adequately, and otherwise providing high quality, appropriate and compliant services.
“During the recent financial crisis, some of the investment products that failed were covered by research houses; some of these products were highly rated or had positive recommendations published about them at or close to the time they collapsed,” ASIC said in its consultation paper which preceded RG79.
“We understand many retail clients and their advisers rely, at least in part, on expert research in making investment decisions and formulating financial advice,” the regulator added.
“We are considering whether the current regulatory requirements for research houses are adequate in the light of recent events.”
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