ASIC is urging all AFS licensees to review their own conflicts management practices following an extensive review of vertically integrated businesses in the funds management industry.
The call to action follows ASIC's release of Report 474: Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry which found deficiencies in many conflicts management policies studied. Key criticisms of the licensees studied included:
- conflicts management policies failed to specifically consider and address the key conflicts of interest in their organisation (especially in identifying and managing situations where different parts of the business are conflicted with the interests of the same clients or clients in other parts of the business); and
- policies and procedures being deficient in matters of outsourcing, product selection, remuneration and board membership.
Although the review only focused on vertically integrated structures in the funds-management industry (being entities involved in at least two of the following areas: funds management, responsible entity, superannuation trustee, platform operator, administrator or custodian), we recommend all AFS licensees consider their own conflicts management frameworks against some of the action items identified below.
1 PROPER IDENTIFICATION OF CONFLICTS OF INTEREST IS ESSENTIAL
ASIC's review found that financial services organisations' conflicts management policies were often generic, rather than tailored to meet the specific challenges and circumstances of each individual business. While not an exhaustive list, AFS licensees should examine whether their conflicts management framework is able to identify the following conflict scenarios:
- a product manufacturer selling products via in-house channels (such as related platforms, dealer groups and financial advisers);
- retaining a related service provider or a common external third-party service provider used by other related entities;
- a responsible entity's (and its officers') fiduciary duties to the members of registered schemes conflicting with its duties to act in the best interests of the shareholders;
- any commissions, benefits or fees received by an AFS provider for products or services provided by related entities, but not received for services or products from unrelated entities;
- inappropriate remuneration structures encouraging employees to promote group-manufactured products or platform products in priority to third party's products;
- directors and responsible persons' holding concurrent directorships within the financial services group and/or having ownership interests in the group; and
- situations requiring an information barrier, such as where the interests of one set of clients could be compromised if the information passed between different entities, business divisions or individuals.
2 MANAGING CONFLICTS REQUIRES MORE THAN A ONE SIZE FITS ALL APPROACH
As part of ASIC's emphasis on the importance of tailoring conflict policies to the business, we recommend AFS licensees consider whether their conflicts management frameworks incorporate the following conflicts actions:
- individualised methods for avoiding conflicts of interest, especially where directors have conflicting obligations;
- management of multiple and related directorships, especially in relation to directors and responsible persons holding concurrent directorships or other positions of influence within related party entities, or with major service providers or distribution channels;
- disclosure to clients of the conflict of interest; and
- specific (rather than general) compliance audits of the conflicts management framework.
ASIC believes that entrenching an individualised approach to conflicts management ensures systems and processes of the business are more likely to deliver the right response to the conflict threat.
3 BUILDING A COMPLIANCE CULTURE IS KEY
A key theme in ASIC's findings is the importance of an organisation's culture regarding conflicts management and in particular, establishing good corporate governance arrangements. Key steps for fostering such a culture include:
- demonstrating priority is given to the interests of clients over shareholders;
- training all staff, including directors and senior staff, about conflicts of interest and the procedure for declaring and managing personal conflicts;
- directors disclosing any conflict of interest at the start of each board meeting with the board to assess the extent to which multiple directorships involve, or could be perceived to involve, conflicts of interest;
- disclosing the organisation's ownership structure, remuneration and business relationships with related parties to clients;
- ensuring appropriate information barriers are in place, including structural separation of the business;
- having the conflicts management policies and procedures approved by the board;
- each service provider (including the related entity or common external party used by the group) to undergo the same outsourcing due diligence review process; and
- the existence of a formalised due diligence process with respect to investment selection and retention for responsible entities and IDPS operators.
The management of conflicts in the funds management industry is not a new issue. ASIC's recent microscope on the issue serves as a useful reminder to all AFS licensees about how best to manage this obligation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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