Financial Services Update: Conflicts of Interest in Practice – Part 1 identification and examples

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This is the first article in a two part series on conflicts of interest in financial services.  In this series, Brooke Benson, Compliance Consultant at CompliSpace, will build upon the insights and concerns identified by ASIC and provide practical insights on the management of conflicts of interests in financial services businesses. Part One will focus on the identification of conflicts of interest. Part Two will explore key business systems to enable you to effectively manage conflicts of interest.

Conflicts of interest come in different shapes and sizes and are a part of everyday business activities. There is no mystery or science to the occurrence of conflicts, so why do businesses consistently try and minimise (or even worse hide) the issue when in fact it does not need to be such a big deal?

So often the issues that surround conflicts of interest are not to do with conflicts themselves, rather the problems that arise from conflicts come from lack of identification and/or poor management.

So how confident are you that your business has identified all of its relevant conflicts of interest? On face value, identifying a conflict of interest seems like a pretty straightforward exercise. However, ASIC raised this as an area of concern and we tend to agree because when you start to turn your mind to identifying the presence of a conflict of interest there a number of factors to be taken into consideration.

What do you think about when you try and identify a conflict of interest in your business? Do you think about:

  • the type of conflict?; or
  • the activity which causes the conflict of interest?; or
  • the capacity in which the conflict arises?

Type

This is the category you are probably most familiar with and it’s the category which receives the most attention in articles, policies and training in this space.

The types of conflicts are either real, potential or perceived. A real conflict is one which actually exists and as such is the easiest to identify, a potential conflict is one which may happen in the future should you do business with a certain party. Identifying this type of conflict is giving the business and others around you a “heads up” so to speak. Finally, a perceived conflict is one which looks to others that there has been some influence on your decision making regardless of whether this is the case or not. It’s the front page test – how would it look if it appeared in the paper?

Activity

There are a number of activities which may result in the presence of a conflict of interest. These include:

  • the receipt or giving of gifts, hospitality or other inducement – who could forget the former NSW Premier Barry O’Farrell and the bottle of Grange?
  • the use of information obtained whilst acting in a certain position – insider trading is the classic example and one which is getting a lot attention from ASIC;
  • the use of your position – such as buying shares in a personal capacity before buying them for clients;
  • the use of remuneration and incentives to drive behaviour; and
  • dealing with related parties.

Capacity

In our experience, this is the category which most people and businesses get stuck on. When thinking about the existence of a conflict of interest, businesses think about it from only one perspective, despite the fact that they clearly have multiple functions and duties.  The classic example is a company that is also a responsible entity, where the identification of a conflict is thought about from one perspective and not the other.

Quick Questions to ask

This is by no means an exhaustive list but here are some questions which you might find helpful to ask during the identification process:

  • Am I (or the company or responsible entity) likely to make a financial gain, or avoid a financial loss, at the expense of the client?
  • Is the receipt of this gift in the interest of my clients?
  • Have I put the interest of clients and the company before my own?
  • Is there some connection or relationship to the party that we are seeking to do business with?
  • Are we putting the interests of one client ahead of another client?
  • Did I receive this information because of my position?
  • Could there be benefits for me in the future that could cast doubt on my objectivity?
  • Have I received a benefit or hospitality from someone who stands to gain or lose from my actions?
  • If I saw someone else doing this, would I suspect that they might have a conflict of interest?

 Final insights

As a holder of an AFS licence, there is an overarching duty of a licensee to provide financial services in a manner which is fair, efficient and honest and for those providing financial services to retail clients and for those licensees who are responsible entities, there is an explicit duty imposed upon to act in the client’s best interest. Usually, the reasons why businesses fail to meet these duties is due to a conflict of interest which hasn’t been identified or properly managed.

In fact, most enforcement activity arises due to the presence and mismanagement of a conflict of interest: misleading and deceptive conduct or insider trading are two examples of conflicts which immediately come to mind. As ASIC is increasing its attention on conduct, culture and conflicts of interest we suggest that now is the  time for you to re visit how conflicts of interest are identified and managed in your business.  We recognise that at times the identification of a conflict of interest can be tricky but as the old saying goes … “short term pain long term gain”.

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