ASIC has updated its regulatory guidance on managing conflicts of interest for Australian financial services businesses.
One of the general obligations of an AFS Licensee is to have in place adequate arrangements for the management of conflicts of interest that arise from the licensees financial services (or from the services provided by the authorised representative of the licensee). Section 912A(1)(aa) Corporations Act. This obligation is a civil penalty provision.
Action required
Licensees should review their arrangements (and those of their authorised representatives) for identifying, raising and managing conflicts of interest, against the updated RG 181, specifically
- update Risk & Compliance Manual and/or Conflicts of Interest Policy;
- update conflicts of interest training modules; and
- update monthly attestations.
It would be timely for Licensees to reiterate Conflicts of Interests obligations with staff and ARs based on the updated RG 181 and to submit any fresh conflict of interest declarations using the Appendix to RG 181. The Appendix provides a catalogue that outlines some key legal obligations and information relevant to conflicts management that may apply to an AFS licensee, representative, or AFS licence applicant.
Key updates in the revised RG 181 include:
- how the law applies to conflicts of interest, including the scope of the conflicts management obligation and links to other related obligations
- the types of conflicts AFS licensees should identify and manage
- the need for robust, tailored arrangements to manage conflicts
- practical steps for effective conflict management, and
- a non-exhaustive ‘catalogue’ of related legal obligations and information.
Scope of the obligation
The conflicts management obligation is broad and is intended to apply widely—it is not limited in its application. It applies to all conflicts of interest other than those wholly outside (i.e. completely separate to) the financial services business of you or your representative.
It applies to conflicts of interest that arise within the financial services business. It also applies to conflicts that arise between something within the financial services business and something outside it, particularly where the relationship, interest or activity may affect (or reasonably appear to affect) how financial services are provided by the business. For example, an employee prioritising their competing personal or financial interest outside the business may affect how they provide financial services within the business, as well as the quality of the services they provide.
What is a conflict of interest?
A conflict of interest can arise where there are competing financial interests, personal interests, business or related party interests—whether direct or indirect—or competing loyalties and obligations. In some circumstances, a combination of these may give rise to a conflict.
You should take a ‘common-sense’ and objective approach to determining if there is a conflict of interest. Whether there is a conflict of interest will ultimately turn on the facts and circumstances of a situation.
Conflicts of interest can be:
(a) actual—where a conflict currently exists that could sway your judgement or actions (or those of your representatives); and
(b) potential—where circumstances do not currently give rise to an actual conflict but could reasonably be expected to do so in the future
Table 1 RG 181 provides illustrative examples of different types of actual and potential conflicts across financial services, with a focus on the factors that give rise to a conflict (such as the competing interests of individuals and their relationships)
What are adequate arrangements?
Your arrangements should be tailored with your own circumstances in mind and designed to meet your obligations. Whether your arrangements are adequate will depend on several factors, including the nature, scale and complexity of your business. (see ASIC v Avestra)
Your arrangements may include:
- policies, processes and procedures;
- people and resources;
- systems and controls over the business and staff; and
- governance and supervisory arrangements.
You should have in place arrangements to identify and assess a conflict or class of conflicts, and to respond to a conflict—that is, effectively manage the conflict.
You should also implement, monitor, maintain and review your arrangements for them to be adequate.
Your arrangements may include, but are not limited to, the steps set out in Table 2 RG 181
You should document and keep records of your arrangements for them to be adequate and to demonstrate your compliance.
Effective conflicts management
Effective conflicts management will generally involve a combination of avoiding, controlling, and disclosing conflicts of interest. This informs the adequacy of your arrangements.
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