June 2006 - ASIC gives guidance on conflicts
The Australian Securities & Investments Commission has released a discussion paper, Managing conflicts of interest in the financial services industry.
The discussion paper uses hypothetical case studies illustrating real or perceived conflicts of interest across the financial services industry to explain ASIC's views on how those conflicts should be managed.
Some case studies are loosely based on real life examples of conflicts ASIC has observed. The paper aims to provide guidance on how the conflicts should be handled.
ASIC says the obligation for all licensees to have in place adequate arrangements to manage conflicts of interest flows from s912A(1)(aa) of the Corporations Act 2001 (the conflicts management obligation). The obligation forms part of licensees' wider compliance and risk management obligations.
The paper examines issues like buyer of last resort, the relationships between product issuers and advisers, insurance brokers and cluster groups, statements of advice, and superannuation funds that pay no commissions.
ASIC's conclusions are that adequate conflicts management arrangements are an important preventative tool. "Good conflicts management arrangements are part of good compliance and risk management measures," the regulator says.
Conflicts of interest impact the quality of financial services provided. In ASIC's experience, poorly managed conflicts of interest tend to result in poor service to consumers and a market that is not fair and transparent.
"Disclosure alone will rarely be sufficient to manage a conflict of interest. Accompanying internal controls are generally always needed to ensure the quality of the underlying service is not compromised," ASIC says.
A simple example ASIC provides is:
"Badger is a member of a cluster group of insurance brokers headed by Cluster Co. Cluster Co provides benefits to members of the cluster such as membership services and distributions. Cluster Co is partly funded by override commissions (ie extra commissions paid on top of the normal rate of commissions) by participating insurers when cluster members place specified lines and levels of business with those insurers."
"Badger is potentially putting its interests above its clients' interests. For disclosure to be an effective part in managing this conflict of interest, the client must be able to make an informed assessment about how the override commissions might affect Badger's recommendations. In particular, the client should understand that the arrangement might result in a preference for the products of participating insurers.
Badger's internal controls should ensure the integrity and quality of its advice is maintained at a high standard. Badger needs to be reasonably confident that, despite the biasing influence of the cluster arrangement, all advice given is appropriate and in the best interests of its clients."
The paper is an interesting read and I recommend members to it. You can find it on the ASIC website, www.asic.gov.au.