Deficiencies in the regimes governing investment research houses pose significant risks for financial advisers, according to a former ASIC official.
Former Australian Securities and Investments Commission staffer Bruce Keenan, now an independent risk and compliance consultant, has penned a submission to the Senate inquiry into the performance of the corporate regulator, calling for a new regulatory system governing research houses, ratings and analysis of financial products.
“ASIC does not have the resources to properly ‘supervise’ the 15,000 investment products, but rather, should better utilise industry ‘gate keepers’ already available,” Mr Keenan said, adding that research houses have the ability to significantly influence adviser decisions.
However, Mr Keenan argued there is an imbalance in the current system whereby advisers are held accountable for product recommendation, but product manufacturers are not.
“There appears to be a clear regulatory imbalance between AFS Licensees (financial planners) and licensed research house providers under the existing ASIC RG 79 in terms of the imposition,” the submission stated.
“Unfortunately, financial planners have now become the ‘cannon fodder’ for the entire intermediary industry and have been targeted for claims involving [collapsed entity] Basis Capital via the industry EDR scheme [under] the guise of ‘inappropriate advice’, which is quite contrary to other wider industries where the ‘manufacturer’ of the ‘product’ is held totally accountable for rectification of any faults.”
ASIC does provide guidance for research houses in RG 79, but Mr Keenan was critical of the lack of any industry basic or consistent system, allowing each research house to instead decide what it considers to be the best method of rating products.
This resulted in there being “no way for investors or consumers to compare ‘apples’ with ‘apples’ between research house providers”, he said.
The submission recommended that all research houses be advised to “adopt, as a minimum standard, more common or identifiable methodologies for assessing or rating products and investor profiles/categories.”
The former regulator highlighted community concern over company and product failures and that much of the criticism had “been wrongly directed towards the financial planning industry”.
If these suggestions were to be adopted, Mr Keenan believes ASIC will receive fewer complaints relating to financial loss, and will be able to better inform investors and target the ‘riskier’ zones.
He considered the most important benefit of the recommended changes is that they were likely to move the volume and spread of investment towards less risky investment zones.
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