The new CLERP 9 section 912A(1)(aa) imposes on licensees direct and specific obligations to have adequate arrangements to manage their conflicts of interest in the delivery of financial services.
Starting January 2005, licensees will need to document their conflict management arrangements (CMA), expressed in a conflict management policy (CMP). CMPs may form part of licensees’ compliance and procedures manuals.
The new obligation imposes significant compliance requirements on licensees and their representatives and will apply to services provided to both retail and wholesale clients. They apply equally to licensees and their representatives.
s912A(1)(aa) addresses the ethics of delivering financial services and provides an overlay to s912A(1)(a) which requires financial services to be provided efficiently, honestly and fairly.
The section addresses conflicts of interest that are material. To assess what is and what is not material, an objective test and some conservatism should be adopted.
The Australian Securities and Investments Commission (ASIC) comments that the management of conflicts of interest through CMAs and the design and implementation of CMPs will “help promote consumer protection and maintain market integrity… licensees whose interests conflict with those of the client are more likely to take advantage of that client in a way that may harm the client and may diminish confidence in the licensee or the market”.
CMPs will need to be ongoing and should contain measures, processes and procedures to maintain adequate conflict management arrangements. They will necessarily have to deal with actual, apparent and potential conflicts of interest.
To do that ASIC indicates that a CMP will use three mechanisms to manage conflicts of interest, namely:
(a) the controlling;
(b) avoiding; and
(c) disclosing of conflicts of interest.
To make sure that conflict management arrangements are adequate and that CMPs are properly designed and prepared, licensees should undertake a systematic examination of their business, at least involving periodic reviews of the business operations of the licensee and of client files and records.
Once designed, but before implementation, the licensee should ensure:
(a) that the CMP is in line with the nature, scale and complexity of the licensee’s business;
(b) that a responsible and qualified person is appointed to oversee the CMP’s implantation and review; and
(c) the CMP is endorsed by senior management.
Once the CMP is implemented, licensees will need to have internal procedures and reporting lines in place to effectively manage and control conflicts.
Because not all conflicts can be controlled, the licensee will need to build mechanisms into its CMP to enable it to avoid those conflicts.
Ultimately, where conflicts are identified or arise they will need to be disclosed. Disclosures must be clear, concise and in an effective form to allow clients to make informed decisions about how the conflict may affect the service being provided to them.
Additionally, ASIC states that disclosures will have to be:
(a) timely;
(b) prominent;
(c) in a form meaningful to clients;
(d) made before service is provided to the client; and
(e) refer to the specific service in which the conflict relates.
For example, disclosures will need to address such issues as:
(i) the extent to which the licensee (or any associated person) has an interest in the financial product, the subject of the financial product advice;
(ii) the extent to which the licensee (or any associated person) is related to or associated with the issuer or provider of the financial products, the subject of the financial product advice; and
(iii) any financial or other benefit the licensee (or any associated person) will receive if the advice is followed.
With the January 1 deadline looming, licensees need to take action now to make sure their CMPs have been designed properly and can be implemented effectively to meet the requirements.
Philip Stevens is a partner with Dibbs Barker Gosling Lawyers.
