The Australian Securities and Investments Commission (ASIC) today announced how it expects financial services licensees to manage their conflicts of interest. This is set out in a new policy published today, Policy Statement 181 Licensing: Managing conflicts of interest [PS 181].
‘The CLERP 9 legislation imposes, for the first time, a direct and specific obligation on licensees to have adequate arrangements to manage their conflicts of interest’, ASIC’s Deputy Executive Director of Financial Services Regulation, Ms Pamela McAlister said.
‘Conflicts of interest can have a significant impact on the quality and integrity of services a licensee provides’, Ms McAlister said.
PS 181 is based on the new conflicts management obligation for licensees implemented by the Commonwealth Government’s Corporate Law and Economic Reform Program (CLERP 9) legislation. The new obligation takes effect from 1 January 2005.
‘We are publishing our policy now to help licensees understand what minimum arrangements they need to have in place to comply with the new conflicts management obligation. ASIC expects licensees to control, disclose and, where necessary, avoid conflicts of interest’, Ms McAlister said.
‘Managing conflicts of interest is an important part of a licensee’s general obligations. Clients and the market as a whole expect licensees to manage conflicts of interest properly. As part of managing their conflicts of interest, we expect licensees to identify, assess and respond to the conflicts of interest that arise in their business,’ Ms McAlister added.
The attachment provides more detail regarding ASIC’s policy.
End of release
Download a copy of Policy Statement 181
Attachment to IR 04-42: ASIC issues conflicts management policy
The Commonwealth Government amended the Corporations Act 2001 with effect from 1 January 2005 to impose an obligation on Australian financial services licensees (AFS licensees) to have adequate arrangements to manage conflicts of interest. This obligation was contained in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 which commenced on 30 June 2004.
ASIC’s policy proposal paper
PS 181 follows ASIC’s policy proposal paper Licensing: Managing conflicts of interest published in October 2003. This policy proposal paper (PPP) set out a number of proposals on what arrangements AFS licensees should put in place so as to comply with the new legislative conflicts management obligation. PS 181 takes into account the 15 submissions ASIC received on the PPP. ASIC thanks all those who made submissions on the PPP.
The PPP contained more detailed draft guidance for research report providers taking into account domestic and international developments (in Schedule 2). This guidance has not been included in PS181. ASIC is finalising its guidance on research report providers and after further discussions with industry will be publishing this guidance as a separate document in September or October.
Our policy statement
To comply with the conflicts management obligation, ASIC expects licensees to have arrangements to manage all conflicts of interest affecting their business. These arrangements will involve the following mechanisms:
- controlling conflicts of interest;
- avoiding conflicts of interest; and
- disclosing conflicts of interest.
Section B of the policy contains guidance on controlling and avoiding conflicts of interest, and Section C contains guidance on disclosing conflicts of interest.
Controlling and avoiding conflicts
In controlling conflicts of interest, we expect that licensees’ arrangements will enable them to:
- identify the conflicts of interest relating to their business;
- assess and evaluate those conflicts; and
- decide upon, and implement, an appropriate response to those conflicts.
Licensees must have written conflicts management arrangements. They must also keep written records of how they manage conflicts of interest (For example, records of disclosures made and actions taken over any breaches of their policies and procedures).
Some conflicts of interest have such a serious potential impact on a licensee or its clients that the only way to adequately manage those conflicts will be to avoid them. In such cases merely disclosing them and imposing internal controls will be inadequate. A licensee’s conflicts management arrangements must enable the licensee to identify and avoid these types of conflicts.
For more information on controlling and avoiding conflicts, see section B of PS 181.
Disclosing conflicts
Part of managing conflicts of interest is making appropriate disclosures to clients. While disclosure alone will often not be enough, disclosure is an integral part of managing conflicts of interest.
Licensees should ensure that clients are adequately informed about any conflicts of interest that may affect the provision of financial services to them. This means providing clear, concise and effective disclosure so that clients can make an informed decision about how the conflict may affect the relevant service. We expect disclosure by licensees to focus on material conflicts.
The new conflicts management obligation itself applies equally to services provided to retail and wholesale clients. We recognise that the disclosure needed to comply with the law for a wholesale client will sometimes be less detailed than for a retail client. What constitutes appropriate disclosure to any given client will depend on all of the facts and circumstances, including:
- the level of financial sophistication of the client;
- the extent to which other clients (especially retail clients) are also likely to rely, directly or indirectly, on the service;
- how much the client already actually knows about the specific conflict; and
- the complexity of the service.
For more information on disclosing conflicts, see section C of PS 181.