It's time to dust off your conflicts of interest policy

Wednesday, 27 June 2018 | By Jesse Vermiglio
Earlier this year, ASIC launched a crusade against poor financial advice.  ASIC looked at how some of Australia’s larger banking and financial services institutions dealt with conflict of interest between selling its in-house products and looking after a client’s best interest.  These issues were also raised by the Banking Royal Commission, and have left the larger banking institutions reconsidering its separate divisions.

What is a conflict of interest?

Firstly, let's address what a conflict of interest is.  Conflicts of interest are circumstances where some or all the interests of people (clients) to whom a licensee (or representative) provides financial services are inconsistent with or diverge from some or all of the interests of the licensee or its representatives.

Before you can determine whether you have a conflict of interest, you first have to identify what your interests (as a licensee or representative) are and what the interests of others (that is, the clients) are.  This is often the hardest part.

Once you’ve identified the different interests present in your business model, you can then determine whether those interests are aligned or whether they diverge or conflict.

If you do identify a conflict of interest, don’t panic – this doesn’t necessarily mean that you have breached the law. 


Conflicts are not necessarily bad

Conflicts of interests always seems to have a negative connotation to it.  However, this is not always the case.  We all have them.  Consciously or unconsciously we spend some of our working day trying to manage them.

For example, who hasn’t woken up after a big night and thought, should I go to work today or should I call in sick?  For some, managing their first conflict of interest of the day happens before they even get out of bed.

But like the person who’s had a big night and is trying to decide whether to put their own interests (of staying home and relaxing) before those of their employer (of going to work and generating more business), financial services businesses also face conflicts of interest.

In ASIC Report 562, the conflict of interest ASIC was testing was whether licensees with vertically integrated business models put their interest of generating greater revenue from recommending in-house products ahead of the interest of consumers receiving advice that is in their best interests.

But this doesn’t mean that licensees with vertical integrated business models are necessarily bad.  As ASIC’s Deputy Chairman, Peter Kell, explained in the Senate Corporations and Financial Services Committee earlier on in the year, it’s not the business model that matters but whether the conflicts are being managed appropriately.


Why is conflicts management so important?

So if it’s the management of the conflict of interest that matters, rather than the business model, what should licensees do if they identify a conflict of interest? 

First, all licensees have an obligation to adequately manage any conflicts of interests that may arise from the financial services they provide.

The three mechanisms that ASIC expects licensees to use when managing conflicts of interest are:  
  • control conflicts of interest – by assessing the conflict and implementing appropriate controls
  • avoid conflicts of interest – where the potential consequences to the licensee and its clients are sufficiently serious that the only way to manage the conflict is to avoid it
  • disclose conflicts of interest – in a way that is timely, prominent, specific and meaningful.
Second, licensees have an obligation to treat their clients fairly.  ASIC generally expects this to mean that:
  • licensees do not unfairly put their interests above those of their clients
  • licensees do not unfairly put the interests of some clients ahead of others
  • licensees do not use client information to advance their own interests.
Third, the Future of Financial Advice (FOFA) reforms impose new obligations not only on licensees but individual advisers to reduce the risk that conflicts of interest lead to poor consumer outcomes through inappropriate advice.  These obligations include:
  • the prohibition on giving or receiving remuneration that can influence the financial product advice provided by advisers
  • the requirement that advisers act in the client’s best interest and give personal advice that is appropriatewhere a conflict exists between the adviser and the client, the requirement that the client’s interest take priority.

Tips for managing conflicts of interest

So, if ASIC’s Report 562 and the recent outcomes arising from the Banking Royal Commission has sparked you into dusting off and reviewing the management of your conflicts of interests, you may want to consider the following tips:

1. Get a conflicts management policy: conflicts management is not just about having a conflicts of interest register.  Make sure you have a policy in place that is tailored to your business and helps you identify and manage conflicts of interest.

2. Examine common areas that may give rise to conflicts:

  • remuneration of staff
  • internal structureslicensee’s interests
  • associations and relationships.

3. Ensure that conflicts arrangements are implemented and maintained: for example, ensure the arrangements are approved by senior management, regularly monitored and reviewed and overseen by a person with responsibility for their implementation, reviewing and updating.

4. For advice businesses – ensure you have robust monitoring and supervision policies in place to ensure that any personal advice provided is in the client’s best interests, appropriate and prioritises the interests of the client. 

And for those of you wondering what decision the person who had the big night made, they decided that their interest of keeping their job took priority and so they dutifully headed off to work – albeit with a fairly big headache.

We can assist by reviewing your conflicts of interest policy.  Our affiliated training business, Compact Compliance & Training, can also provide you and your staff with best interest duty training that is tailored to your business.  For more information, or for assistance, please contact our financial services team.

An earlier version of this article was published in the February 2018 edition of T-REX.  T-REX is a monthly, Tailored, Regulatory EXchange service that monitors and summaries regulatory changes relevant to specific industries.  For more information about T-REX, please click here.

Author: Jesse Vermiglio (Partner)

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