ASIC chairman Greg Medcraft flags new broker guidelines on conflicts
Australian Financial Review May 25 2017 5:39 PM
Joyce Moullakis
The corporate regulator is poised to release stringent guidelines around Chinese walls at stockbroking firms, to "preserve the independence" of research after a string of incidents, chairman Greg Medcraft said on Thursday.
The Australian Securities and Investments Commission boss said the new guidelines would be released imminently, after the regulator had scrutinised processes across the industry.
"We've had some instances as you know ... we've had some learnings about separating research and the underwriting function," Mr Medcraft told reporters on the sidelines of the annual Stockbrokers and Financial Advisers Association (SAFAA) Conference.
"What we've got to do is to make sure the walls are pretty solid between the two and that there can't be pressure.
"The people doing the capital underwriting and the fundraising shouldn't be able to influence what is supposedly independent [investor] research."
Mr Medcraft also noted the major retail banks were caught up in the broader issue of winning back trust from consumers, particularly after being hit by the federal government's proposed bank tax, among other accountability measures.
"I don't think they read the writing on the wall quickly enough and therefore they are getting changes that are quite dramatic at the moment," he said.
Taking banks to task
ASIC has taken the banks to task on their foreign exchange operations while many have also had run-ins around financial advice.
Then there is the legal action around alleged manipulation of the bank bill swap rate, where ASIC is pursuing Westpac Banking Corp, National Australia Bank and ANZ Banking Group.
While refusing to comment directly on Commonwealth Bank of Australia on Thursday, Mr Medcraft said: "some of these the alleged incidents have still not exhausted their statute of limitations".
Chinese walls, as they are referred to in the industry, are designed to separate corporate advisory deal teams from research divisions.
The UBS report, originally titled "Bad for the budget, good for the state", was later reissued with the new title "Good for the state". ASIC finalised its response to the matter almost 18 months ago after UBS agreed to remedial measures in its research arm including changes to policies, procedures and training.
Mr Medcraft said the new guidelines would cover areas including strengthening processes around how broking and advisory firms identified and handled confidential information.
They will also outline restrictions on interactions between equity research analysts, corporate advisory and companies that are raising capital.
Research funding recommendations
As part of the document, ASIC will make recommendations on the structure and funding of research and stress the importance of "appropriate compliance and control functions".
Mr Medcraft said the new guidelines did not go as far as measures in Europe to unbundle research from other functions within investment banks. They are the latest tranche of the EU's Markets in Financial Instruments Directive (known as Mifid II).
"We think it's a proportionate response," he said. "We are not going as far as the Europeans have done."
Mr Medcraft's comments on the guidelines prompted a mixed response.
Fund managers, who buy into floats and capital raisings, generally saw the moves as positive. "It will go some way to removing the conflict," one investor said on the basis of anonymity. He said problems often centred on smaller broking firms where research and corporate teams worked more closely on deals.
A banker, who declined to be named, said: "I don't think even more regulation is a good thing."
Mr Medcraft's speech at the conference was titled "The importance of trust in a digital world".
He noted that banks, stockbrokers and other companies were also more susceptible to the 24-hour news cycle and social media, ensuring they were "increasingly held to account" for any perceived bad behaviour.
"For all businesses these days they are starting to realise the power of the crowd," Mr Medcraft added. "Expectations in the community are changing and that's one of issues that caught the banks on the hop."
Cyber crime threat
Mr Medcraft also spoke about the average cost of $5.6 million per attack of cyber crime in Australia, and the potential for the breaches to "destroy a company's value overnight".
"Cyber attacks are only going to grow and resilience is only going to grow in importance," Mr Medcraft added.
He believes the continued evolution of new technologies was spurring a "re-invention of the banking system."
"It's conceivable that AI (artificial intelligence) may be able to predict the rise and fall of the share market more effectively than humans," Mr Medcraft said.