Can conflicts of interest and duty be managed?
Much of the Royal Commission’s approach appears to have been built around the question which is among the first the Commissioner poses in the Interim Report – Can conflicts of interest and duty be managed?
As Professor Sunita Sah notes in a background paper prepared for the Royal Commission, not all conflicts stem from corruption.
Actual or potential conflicts of interest may arise for advisers, advice licensees or managed account providers. Those conflicts include, through the recommendation of managed accounts, preference for a managed account product or service in which:
- the advice licensee or a related party has a financial interest in the managed account service, the underlying investments or associated transaction revenue (‘in-house product’); or
- The adviser benefits from operational benefits and consequent practice efficiencies to the adviser; or
- The managed account service is offered as part of a broader service by a key service provider, such as a platform, but has an investment selection which is of necessity a subset of all available investments.
Each of these representative conflicts gives rise either to a direct financial interest on the part of the adviser or advice licensee, or an indirect benefit through an improvement to the operational efficiency of the advice business.
The Treasury Submission on Key Policy Issues 13 July 20181 identifies three generic sources of conflict:
- The remuneration structure of financial advisers...;
- Financial advice business models, and incentives to create ongoing advice relationships with customers; and
- Integrated business models that combine financial advice with other financial products and services.
Conflicts arising from a need for a more efficient advice process are examples of the third issue identified by Treasury.
Substantial work has already been undertaken by ASIC and other Government agencies to identify and address conflicts, and the way these are treated by advisers and financial product manufacturers. These include the FoFA reforms, the Royal Commission, ASIC 2018 Report 562 ‘Financial Advice: Vertically integrated institutions and conflicts of interest’, increased powers for ASIC, and impending changes to Design and Distribution obligations.
As a result of this work and the way it has been express in regulation, in recommending managed accounts, there are more protections for retail investors than apply in other areas of retail financial services. These include:
- Fiduciary standard Best Interest obligations for responsible entities and MDA providers;
- Best Interest Duty obligations of providers of personal advice to retail clients;
- Extensive disclosure of fees under RG97, both initially and on an annual basis; and
- Obligations on superannuation trustees to review products offered through their platforms.
In their papers, Treasury note2 that the actions taken to date and heightened awareness by AFS licensees, “act to mitigate the misconduct risks involved”.
Well developed managed account programs lead to better advice outcomes for clients, and better more sustainable businesses for advisers. ASIC needs to be careful that the response to the Royal Commission’s Final Report doesn’t lead to less informed advisers providing poorer quality advice.
Toby Potter
Chair
