Corporations Act: the root of conflicts of interest?

The legal structure that financial advisers operate within has served to create many of the potential conflicts of interest the industry is struggling with, according to the deputy chief executive of the Financial Planning Association (FPA), Deen Sanders.

In particular, the licensing requirements of the Corporations Act create a stumbling block for an industry looking for a better solution to real and perceived conflicts of interest than disclosure.

“The reality of life in financial services is that the Corporations Act specifically encourages a divided loyalty from a financial planner by making it a prerequisite for an individual to be authorised by an Australian Financial Services Licensee (AFSL) before they can provide advice,” Sanders said.

“This simple but profound disregard for individual professionals and their obligations to their client embeds a loyalty to the corporate AFSL holder, who naturally has obligations to other parties”.

Those other parties might include shareholders, directors or even regulators.

Sanders said while the “challenge of divided loyalty” is dealt with by advisers and licensees in favour of their clients, nonetheless it is “the law itself that encourages the conflict”.

He pointed to the first recommendation of the Ripoll Inquiry to introduce an explicit fiduciary duty for financial advisers operating under an AFSL.

“How then will they reconcile their expectations that a ‘fiduciary duty’ will transform the way advice is provided and remunerated for, noting the current divided loyalty embedded in the Corporations Act?”