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Ratings conflicts in the firing line

Dodgy transactions between ratings agencies and product manufacturers should be a high-priority post-election issue, according to the Association of Independently-owned Financial Planners (AIOFP).

Reflecting on an International Herald Tribune article revealing Wall Street underwriters had paid Standard & Poors for higher ratings in the lead up to the global financial crisis, AIOFP executive director Peter Johnston said this issue exists in Australia as well.

“Thankfully, S&P have now left Australia but this culture in the Australian market has not changed,” Mr Johnston wrote in an email to stakeholders.

“With the exception of Mercer, most other research houses accept product manufacturer payments of some description to rate their products.

“This profoundly conflicted process was highly responsible for our markets' $36 billion of failed or frozen funds since 2006 where the product manufacturers had bought a favourable rating to enhance their products appeal to advisers and consumers.”

Mr Johnston said attempts to alert former financial services minister Bill Shorten to the issue had fallen on deaf ears.

“Unfortunately, [Mr Shorten] showed no interest, preferring to blame the advisers regardless of strong mitigating circumstances and then used it to justify his discriminatory actions against advisers with FOFA,” he said.

The AIOFP recently formed a consultative committee of its members to more effectively lobby for its political objectives.

Along with cross-subsidisation by vertically integrated companies, Mr Johnston said the issue of conflicted relationships between rating agencies, research houses and product issuers will be high up on the committee’s agenda following the election.

“Reliable, professionally-funded research must be the most important aspect to a practice; if you get the product/strategy wrong you will not be in business very long,” Mr Johnston told ifa.

“Best practice is only the advisers funding research. As recent history has shown, when you get product manufacturers shopping around for ratings, corruption and manipulation compromises the process.”