Unpacking Conflicts Of Interest

GUEST COLUMNIST – KATRINA SHANKS

Mitigating and managing conflicts of interest is a key element in the new disclosure requirements, writes Katrina Shanks, CEO of Financial Advice NZ. But how can advisers spot potential conflicts and act on them?

Driving good client outcomes is central to the new regime and the role of financial advisers, including disclosure. The financial advice given must be informed by clients’ needs and delivered to them with transparency, clear communication, and honesty. And it’s in this spirit that conflicts of interest need to be addressed.

The reality is that conflicts of interest are not wrong in themselves; it is how they are managed that is important. Managed well, conflicts of interest have a key role in nurturing two-way trust-based client relationships, and more broadly, in building public trust and confidence in the value of advice.

And of course, financial advisers are in a privileged position: Clients entrust their adviser with detailed information about their circumstances, personal life and finances; information that they would share with very few people. But trust isn’t a given; it must be earned, built over time, and honoured with good conduct.

So, what is a Conflict of Interest?

The effective management of conflicts of interest has been a key consideration for the policy makers, who addressed it with a layered approach. Obligations for financial advisers are at three levels:

• The duty to give priority to clients’ interests (as per the new FSLAA regime)
• The duty to treat clients fairly, act with integrity, and give financial advice that is suitable (as per the Code of Professional Conduct)
• The duty to disclose conflicts of interest (as per the new Disclosure requirements)

  

Conflict of interest is defined as any “information relating to the commissions, incentives or other conflicts of interest that a client might perceive as having potential to materially influence the financial advice.”

When disclosing conflicts, advisers need to take all the required steps to ensure that the client has not only been informed, but also understood what the conflict of interest was and how it could influence the advice given.

How to identify conflicts of interest

While the definition may seem vague or too broad, identifying conflicts of interest is actually easy. And it applies throughout the whole duration of the provision of the financial advice service.

At every step, it is important to be aware there’s a potential for conflicts of interest…

At every step, it is important to be aware there’s a potential for conflicts of interest, to assess motivation, and ensure that recommendations have not been influenced by anything other than the client’s needs and goals.

Here are some practical examples:

• Cover replacement: The replacement of an insurance policy is a potential conflict of interest because the adviser receives a commission from the provider for the new policy.
  If challenged, the adviser needs to be able to demonstrate that they acted in their clients’ best interest (for example, proving why the new policy was the most appropriate option for the client, especially if there is a reduction in cover or an increase in premiums).
• Clients’ cancellation of policy: When a client wants to cancel a policy within the clawback period, and has legitimate reasons for wanting to do so, but the adviser seeks to get the client to keep the policy in force until the end of the clawback period.
• Provider’s direct or indirect involvement in the adviser’s personal life: If the adviser recommends an insurance policy and the adviser knows that the insurer provides support to their local school, or their children’s cricket team, the adviser should disclose this information with the client. It’s important to note that conflicts of interest can arise even if the benefit received is indirect.

…conflicts of interest must be disclosed in writing in simple clear language…

How to manage conflicts effectively

Communication is key: conflicts of interest must be disclosed in writing in simple clear language. This shows clients that the adviser is managing the conflict, and proactively doing something about it.

Here are some useful principles that advisers need to follow, for effective conflict management:

• Conflicts of interest do not need to be avoided altogether, but when they are known they should be acknowledged and to the extent possible managed
• Clients’ interests always come first
• Reasonable steps must be taken to ensure the advice isn’t materially influenced by conflicts of interest
• Advisers must act with integrity
• Conflicts of interest arise in any situation where parties have competing (or perceived to be competing) interests or loyalties – and this applies to any person associated with an adviser’s advice

Updated workbook

At Financial Advice NZ, we’re working to create up-to-date resources to help our members meet their obligations under the new regime.

In light of the new disclosure requirements, we’ll soon be releasing an updated version of Workbook 1 – Readiness for the new financial regime – Priority to clients’ interests.

Visit Financial Advice NZ to stay informed with our latest updates.