ASIC has today released a report outlining its findings of an extensive review of the conflicts management practices in vertically integrated businesses in the funds management industry.
ASIC was specifically concerned about those entities with a vertically integrated business, that is, those entities which operate at least two of funds management, responsible entity, superannuation trustee, platform structure (IDPS and IDPS-like structure), investment administration and custody business. Our view is that these models may create more opportunity for conflict to arise. The review did not address the deposit taking, insurance, financial advice and product manufacturing businesses.
The two-stage review involved 12 significant participants in the funds management industry. It was informed by our other work on conduct risk and culture, for example, in the investment banking space.
ASIC is encouraged that many organisations appear to take their conflicts management obligations seriously, with detailed and tailored policies that appear to be embedded in business practices from boards and senior management, cascading down to business units.
Entities were able to demonstrate a commitment to reviewing and updating the policy, communication and training.
However, in some organisations reviewed, it appears that the conflicts policy is one of many policies which has been prepared to satisfy a regulatory requirement rather than seeking to properly identify and address conflicts and embed requirements to address conflicts into business practices.
ASIC Commissioner Greg Tanzer said, 'We are pleased that ASIC has been able to contribute to the international focus on culture within organisations with this, and previous reviews, revealing good examples of companies committed to conflicts management.
'However, it is clear that some organisations adopt a generic template conflicts policy, with no demonstrated commitment to the conflicts management in the organisation. We saw some very real examples where the conflict in question was so fundamental that complete avoidance was necessary – the conflict could simply not be managed internally and disclosed externally.
'We consider that a failure to identify and manage conflicts of interest may lead to significant breaches of the Corporations Act and fiduciary duties, and result in reputational and financial damage', Mr Tanzer said.
ASIC Chairman, Greg Medcraft said, 'As our work on culture has indicated, the 'tone', being the attitude and commitment to conflicts management, must come from the 'top' and needs to be appropriately cascaded down the organisation through business practices, communication and accountability, as well as appropriate governance and remuneration.
'ASIC encourages all Australian financial services licence holders to carefully review the findings of this report, whatever their market sector, to assess their own approach to conflicts management and broader cultural issues', Mr Medcraft said.
Going forward, ASIC will continue its focus on culture and conflicts management across the financial services industry and will work with individual participants to address any shortcomings identified in this review.
Download
Report 474, Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry
See also:
- Regulatory Guide 181, Licensing: managing conflicts of interest
- Report 408, Review of the implementation of RG 148: Platforms that are managed investment schemes
- Financial Services Inquiry Final Report dated 7 December 2014
- Government's response to the Inquiry dated 20 October 2015