Financial services providers that aren’t complying with FAIS Conflicts of Interest legislation won’t be given any further leeway. We’ve always followed the approach of giving companies time to rectify what they’re doing wrong. But they’ve had enough time, and we’re moving into a new phase of enforcing the legislation.
An amendment to the FAIS General Code of Conduct for financial services providers and representatives, the legislation has been fully in force since 1 April this year. It addresses concerns the FSB has had about conflicts of interest between financial services providers, representatives and clients and severely affects the practice of incentives that financial services providers use to reward both tied and independent financial advisers for achieving sales objectives.
The requirement to avoid conflicts of interest is not new. Though only a few lines long, it has always been part of FAIS. The new amendment spells out the policy in detail and leaves companies with little or no room to prevaricate; however, as it is more principles-based than rules-based, companies need to figure out how best to interpret and apply the amendment to their businesses.
Julie Methven, CEO of the Compliance Institute said that some companies view conflicts of interest as a compliance issue that simply requires a policy. Yet, effectively managing conflicts of interest rests means instilling the principles into your business practices and transactions with your clients. While the compliance function plays a key role, ultimate responsibility for ensuring that conflicts of interest are properly managed lies with management. Companies know the legislation is there, yet management still hasn’t questioned itself about what it means to the business.
Churning is still prevalent. Clients are being advised to switch out of blue chip shares or a well-performing collective investment into risky investments such as certain property syndication schemes for the sake of the high commissions. Companies that do this aren’t thinking about their clients. Companies’ incentive and commission structures continued to drive their representatives to bring in business by advising their clients to move between products, particularly life products, even though this is often to clients’ detriment.
These practices in the FSB’s view will affect the ‘quality of business’ principle companies must comply with when giving representatives incentives. Companies say they comply with the ‘quality business’ principle, yet failing to act in the best interests of your clients undermines this. Companies should put processes in place to monitor the quality of business that representatives brought in. Management is responsible for managing business quality but can’t do so without proper processes.
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