Ratings houses' day of reckoning

Ratings houses in the retail funds management space will face increased regulatory scrutiny from 1 September this year. 

Australian Securities and Investments Commission (ASIC) Regulatory Guide 79 sets out increased requirements for ratings houses when it comes to disclosure of conflicts, transparency, and the quality of the research process. 

Zenith Investment Partners director David Wright said the biggest impact for his business would be the higher reporting standards, which will increase costs. 

"[ASIC] wants things like breakdowns of your ratings across your entire universe as well as by sector, [in order] to be more open and transparent to the user and potential users," he said. 

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Wright gave "full credit" to ASIC for understanding the nuances between the different sorts of ratings business models in the Australian market. 

Morningstar chief executive Anthony Serhan said he was "fully supportive of what ASIC is doing", but he was slightly disappointed with one aspect of the final regulatory guide.

"When this process first started there was some indication ASIC would consider the banning of an issuer-paid business model for fund research," Serhan said. 

But he was happy that there was now a very clear framework in place to disclose, control and monitor so-called 'pay for ratings' business models.

Lonsec chief executive Amanda Gillespie - whose business operates a 'direct' model whereby fund managers are charged to be part of the research process - also welcomed the ASIC report. 

"The reality is that all research providers in the Australian market have conflicts they need to manage," she said. 

She pointed out that subscription-based business models may not appear to be taking revenue from fund managers directly, "but there is still a revenue flow between the fund manager and the research house". 

Gillespie welcomed the fact that indirect revenue flows between ratings houses and fund managers would need to be disclosed under RG 79. 

According to Wright, the reality is that ratings houses cannot be sustained though subscription revenue alone without the end user (ie, consumer) paying a higher fee. 

"All [ratings] businesses in one shape or form subsidise [the end user fee] by charging managers to participate in the ratings process. They might charge managers for data collection, conference participation or software," he said. 

But for van Eyk chief executive Mark Thomas - who says his business accepts no payments from fund managers around the ratings process - the fees he charges to fund managers for conference participation are completely independent of the ratings process. 

Thomas said he was heartened by the fact that ASIC is requiring the disclosure of payments for ratings on the front page of reports. 

But he was disappointed that ASIC hadn't required the same disclosure to be included on Statements of Advice, so that the end client would be aware of any potential conflicts of interest. 

Mercer could not be contacted before Money Management went to print.