In a submission to the Senate inquiry into the performance of the ASIC, the FPA said the corporate regulator must be legally obliged to take a larger role in the oversight of gatekeepers.
In particular, ASIC must be more involved in the oversight of financial products before they are released to consumers, the submission said.
“Legislation must enable ASIC to effectively and proactively regulate product providers and the products they develop and sell to consumers,” the FPA said. “Product providers should be held accountable for failing to deliver on product benefits due to dishonest conduct, fraud or insolvency, or if there are fundamental flaws in products.”
The submission also set its sights on research houses, arguing that the current requirements of them are not effective in protecting consumers “given the influence research houses have, either directly or indirectly, on consumers’ investment decisions”.
“There is a disconnect between the role research houses believe they have and the role they actually play in the provision of financial products and service to Australian consumers,” the submission said.
As an example of the failings of research houses, the FPA pointed to the collapsed Australian hedge fund Basis Capital.
“Basis received glowing reports and high ratings from several research houses. This influenced financial planners’ views of the product and consumers decision to invest in the product,” the FPA claimed.
“Westpoint is another notable example where some reputable research houses continued to give the product a highly positive rating,” the submission said.
In the case of Trio Capital, research houses relied on the information provided by the product provider and failed to do their own independent research, the FPA said.
“It is unclear how much and in what way licensees and financial planners can rely on research house research and ratings in relation to errors of fact, timing of ratings and adjustment of ratings. There is no accountability for research houses in this regard,” the submission said.
Because financial planning licensees do not tend to have the resources to conduct their own research into product providers, they are forced to rely on research houses to satisfy the requirments of ASIC and the Financial Ombudman Service, the FPA pointed out.
“The role research houses play in providing research and specialist assessments of financial products which influence consumers’ investment decisions is not recognised by the research house industry, or in the regulatory and dispute resolution environment,” the submission said.
The FPA also called for the regulatory system to encourage the establishment of professional bodies to impose “appropriate and enforceable professional standards that exceed the law, on financial product providers, research houses, and other industries in the gatekeeper space”.
