The corporate regulator has launched a consultation on its regulatory guidance for AFSLs, a document that hasn’t been updated for over two decades.
Regulatory Guide 181 Licensing: Managing conflicts of interest was last updated in August 2004.
The proposed changes aim to align the guidance with changes in law, with ASIC specifying that submissions into its public and private markets discussion raised concerns that further clarification was required.
“Conflicts of interest are a key risk in private markets – for example, those arising from related party transactions and fee and distribution arrangements,” the draft consultation paper said.
“They are a significant driver of potential misconduct and often have adverse outcomes for market efficiency and investor fairness.”
The guide sets out the regulator’s general approach to compliance with the statutory obligation to manage conflicts of interest, as well as guidance for licensees generally on controlling and avoiding conflicts of interest and disclosing conflicts.
The updated guidance will outline how the law applies, including its scope and interaction with other related obligations; the types of conflicts AFSLs need to identify and manage to meet their obligation; the need to have adequate arrangements to manage conflicts; and how licensees can effectively manage conflicts.
The new guidance would also include “illustrative examples” of the types of conflicts of interest that an AFS licensee may need to consider and additional guidance on what “adequate arrangements” for managing conflicts involve.
The guidance also outlines fair treatment of clients and members.
“For effective conflicts management, you should ensure that clients and members are treated fairly,” the discussion paper said.
“This does not prevent you from ‘market making’ – that is, making a profit or expecting a return (e.g. fees) in exchange for providing products and services. However, you should be fair in your dealings.”
The paper said disclosure can help to manage conflicts, but remuneration practices that create significant conflicts should be avoided rather than merely disclosed.
Furthermore, remuneration practices that are purely intended to maximise fees or returns at the expense of clients or members should be avoided, and volume-based remuneration is also considered to be conflicted as it creates incentives to maximise sales at the expense of a client’s interests.
The draft guidance includes a “roadmap”, providing a non-exhaustive list of legal obligations and ASIC guidance,that may be relevant to an AFS licensee’s conflicts management obligations.
ASIC will also publish findings from its surveillance focusing on auditors’ compliance with their independence and conflicts of interest obligations later this year.
ASIC Commissioner Kate O’Rourke said conflicts management is a core obligation for financial services businesses and helps promote consumer protection and market credibility.
“Conflicts of interest are more than mere moral dilemmas,” O’Rourke said.
“They can undermine trust, integrity and performance, causing serious harm to consumers, investors and overall market confidence.”
