AFS Licensees must have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or an employee, authorised representative or any other person acting on behalf of the licensee. (section 912A(1)(aa) Corporations Act.
ASIC notes the underlying principles for this obligation (refer RG 181.13 and 181.14):
- Adequate conflicts management arrangements help minimise the potential adverse impact of conflicts of interest on clients. Conflicts management arrangements thereby help promote consumer protection and maintain market integrity. Without adequate conflicts management arrangements, licensees whose interests conflict with those of the client are more likely to take advantage of that client in a way that may harm that client and may diminish confidence in the licensee or the market. and
- Having adequate conflicts management arrangements should also help a licensee ensure that the quality of their financial services is not significantly compromised by conflicts of interest. The quality of a service is significantly compromised if the service is of materially lesser quality than the licensee would have been likely to provide if they were not subject to the relevant conflict of interest
Examples of Conflicts of Interest in General Insurance
Typical examples include:
- having a family or personal relationship with a client. Such as a family member holding an insurance policy with your company and making a claim on that policy and you are an underwriter/claims handler at that company or your partner works at an insurance broker with whom your company does business with;
- having an interest in a service supplier who provides services to your business;
- receiving confidential non-public information (as a broker or underwriter) about an insured who is an ASX listed company and using that information to trade on the stock exchange prior to any public disclosure by the ASX listed company or informing another person who subsequently trades (insider trading);
- brokers (when acting on behalf of an insured) receiving commissions, profit share or other monetary arrangements or non-monetary benefits from an insurer such as IT systems, training, marketing etc;
- Acting on behalf of an insured in a third-party claim where indemnity made be declined in full or in part or acting on behalf of 2 or more insureds in the same insurance claim;
- Brokers acting for 2 or more clients who are looking (or have) to enter into a contractual relationship;
- Underwriters or brokers with aggressive sales targets based on volumes without any counter-balancing metrics;
- receiving gifts, benefits, gratuities or entertainment from a provider;
- brokers or service suppliers having equity in an insurer or underwriting agency; and
- being a director on a board of a client.
Retail or wholesale clients
A licensee’s obligation to manage conflicts of interest does not depend on whether its clients are retail or wholesale. Licensees must have adequate arrangements to identify and manage all conflicts of interest (other that those that occur wholly outside a licensee’s financial services business), whether they relate to retail clients or wholesale clients. Licensees are also obliged to operate efficiently, honestly and fairly in relation to all clients. (RG 181.22)
Managing conflicts of interest
The conflicts management obligation does not prohibit all conflicts of interest. It does not provide that a licensee can never provide financial services if a conflict of interest exists. Rather, the conflicts management obligation requires that all conflicts of interest be adequately managed. Many conflicts of interest can be managed by a combination of:
(a) internal controls (see RG 181.28–RG 181.41); and
(b) disclosures (see RG 181.49–RG 181.63).
However, some conflicts cannot be managed in this way: where conflicts cannot be adequately managed through controls and disclosure, the licensee must avoid the conflict or refrain from providing the affected financial service: see RG 181.42–RG 181.43.
What Licensees in General Insurance should have in place to adequately manage conflicts of interest.
ASIC advises, to be adequate, conflicts management arrangements must successfully identify conflicts of interest and control the effects of those conflicts on the provision of financial services so that the quality of those financial services is not significantly compromised.
Licensees should monitor whether their conflict management arrangements successfully do this.
Licensees should have monitoring procedures in place to ensure that any non-compliance with the licensee’s conflicts management arrangements are identified and appropriately acted upon. Licensees should record action taken on breaches.
Arrangements that are not monitored and enforced are unlikely to be adequate. (refer RG 181.30 and RG 181.31).
It follows from the above that Licensees must:
- Have a documented Conflicts of Interest Policy or include the management of conflicts in a Risk & Compliance manual, or similar;
- Have a Conflicts of Interest register where all conflicts are recorded including the management of those conflicts and who approved;
- Conduct training for all employees, authorised representatives and others providing financial services on behalf of the licensee (representatives) during induction and at a minimum, annually;
- Require all representatives to disclose any new or variation to existing conflicts as part of monthly/quarterly attestation declarations; and
- Monitor conflicts of interest arrangements through key controls (including periodically testing the key controls), quality assurance, compliance reviews & where relevant by internal audit.
Should you need assistance in setting up or reviewing your arrangements for managing conflicts of interests do not hesitate to contact me.