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ASIC's observations and conclusions on Conflict of Interest

The following is taken from the ASIC discussion paper on Managing Conflicts of Interest in the Financial Services Industry released 19 April 2006.

Whilst this list should not be read a definitive guide to ASIC’s view on how to approach conflicts of interest it does provide an insightful view of ASIC’s experience of dealing with this issue in practice. The full report can be accessed at www.asic.gov.au/ppp

  1. Adequate conflicts management arrangements are an important preventative tool. Good conflicts management arrangements are part of good compliance and risk management measures.

  2. Conflicts of interest impact the quality of financial services provided. In our experience, poorly managed conflicts of interest tend to result in poor service to consumers and a market that is not fair and transparent.

  3. Disclosure alone will rarely be sufficient to manage a conflict of interest. Accompanying internal controls are generally always needed to ensure that the quality of the underlying service is not compromised.

  4. Some conflicts of interest are so serious that they cannot be managed by internal controls and disclosure, and must be avoided. Whether a conflict should be avoided will be determined by both the nature of the conflict and the nature of the firm.

  5. Serious conflicts need to be avoided, not because they will always lead to actual harm to clients or to the market, but because allowing such conflicts to continue creates a high risk of that harm occurring. Firms need to take a risk management approach and ask themselves what level of risk their conflicts of interest expose them to. With some conflicts, the risk of an adverse consumer or market integrity outcome is too high—and these conflicts need to be avoided. Prudent firms will avoid such ‘high-risk’ conflicts.

  6. Conflicts management arrangements will not be adequate unless they are actually implemented and maintained. They should be periodically tested to ensure that they are working and changes should be made if they are not. Where necessary, licensees must report failures to manage conflicts to ASIC under the breach notification requirements.

  7. Compliance staff must have sufficient expertise and training to understand their business. Compliance staff should also have support from senior management. This will help them to be seen as credible by management, operations and front office staff which will in turn help them to implement adequate conflicts management arrangements.

  8. Where disclosure is used as part of a licensee’s conflicts management arrangements it must be meaningful, that is, it must be clear, concrete and specific. The person receiving the financial service must be able to understand the nature and effect of the actual conflict of interest and its potential impact on the service being provided.

  9. An important internal control is monitoring and supervision of staff and representatives. This is more difficult where staff and representatives are widely geographically distributed. Regardless, licensees need to ensure that their monitoring and supervision arrangements are effective.

Date 01.06.06