The successful management of conflict of interests is a crucial part of any organisation. Conflicts of interest can arise between employees and their employers and representatives, and between an organisation and its customers. Conflicts of interest can arise even though there is no financial loss and regardless of the motivations of the people and companies involved.
The obligations of financial service licensees to manage conflicts of interest are outlined in the Corporations Act and ASIC Regulatory Guide 181. The common law surrounding fiduciary duties is also highly relevant.
Section 912A (aa) of the Corporations Act states that a financial services licensee must:
“have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative”.
ASIC expects all licensees to document their conflicts of interest and how they have dealt with them. Licensees commonly set up registers of conflicts of interest which describe these conflicts, the assessment of the conflicts and the strategies to deal with them. Ultimately, it is the board of directors which is responsible for ensuring that the licensee complies with the law and operates in a manner which is consistent with the ASIC guidelines on conflicts of interest management.
ASIC’s policy guide on conflicts of interest management applies to both retail and wholesale clients. It does not matter whether a person feels, subjectively, that they were not conflicted when providing a financial service or dealing in a financial product. The key word is PERCEPTION. A conflict of interest arises when a reasonable person would perceive, objectively, that the interests of the person conflicted with the interests of the client.
The three mechanisms for managing conflicts of interest are:
- controlling conflict of interests.
- avoiding conflicts of interest; and
- disclosing conflicts of interest.
To control conflicts of interest a licensee must:
- identify the conflicts relating to their business;
- assess and evaluate those conflicts; and
- decide upon, and implement, an appropriate response to those conflicts.
Some common examples of conflicts which may arise are:
- employees gaining employment with, or accepting remuneration from, or providing services to a competitor or a supplier to the licensee
- employees undertaking other business activities which can affect their availability and loyalty to their employers
- employees and members of their family accepting or soliciting gifts (including accommodation and travel) or lavish entertainment from other companies which either compete with or do business with the licensee
- employees and members of their family being directors of or having substantial investments in or business relationships with the licensee’s competitors, customers or suppliers
- employees and members of their family being engaged in any transaction with the licensee if they have a substantial interest in the transaction
- employees making use of confidential information gained from their employment to gain improper benefits for themselves or their friends and family
- the company or its employees give or promise to give or offer directly or indirectly gifts or something else of value (eg employment opportunities) to gain a business advantage or influence an action to benefit the company
- the company requiring its employees to recommend investment in its financial products where these products may not meet the investment objectives or risk profile of the investors
- bribery of any person to gain an unfair benefit or advantage, by the company or any of its employees
- the company or employees or their employees’ friends or family members making use of confidential and non-public information for their own benefit EG insider trading or market manipulation
- an employee having conflicted multiple roles in a licensee, for example being a shareholder, director, responsible manager and compliance officer, which often occurs in smaller start up licensees
Note that the term “employees” may include directors, management, staff, consultants and authorised representatives.
Where companies face conflicts of interest, the board of directors must set the right tone and direction for the company. This can be difficult, particularly if there is a sole director. In such instances, it is helpful for a licensee to have a compliance committee although this is not a legal regulatory requirement except for responsible entities of registered managed investment schemes.
Know Compliance can assist licensees which have conflicts of interest, particularly if the licensees’ compliance officers have multiple roles which implies that the compliance officers are monitoring their own activities and having to handle breaches caused by their own actions. Such conflicts can prevent a licensee from expanding its operations and services to customers who do value well governed and well run service providers.