Navigating Conflicts of Interest in the Financial Sector

Conflicts of interest can occur in any workplace – individuals and organisations that deal in financial services face even greater scrutiny when it comes to conflicts of interest, and there are strict regulations in place to prevent harm to consumers.

Did you know?

Conflicts of interest has been a focus of regulator enforcement for longer than we might think.

Marking 25 years since the first-ever conflict of interest charges brought under Corporations Law

From 1996-99 Paul John Borella, an investment adviser with National Australia Bank (NAB), advised eight clients to invest in Chatham Finance Pty Ltd, a company in which he was a director and shareholder. The investment was not authorised by NAB, from which he held a proper authority.

Chatham was involved in a debt factoring arrangement and horse racing industry magazine. All these failed, with losses of $235,000. NAB notified ASIC, supported the investigation, and arranged compensation for the clients’ losses.

Borella was prosecuted and in 2000 convicted of conflict of interest charges because he made investment recommendations without disclosing that he had a conflicting interest. ASIC banned him for five years from acting as a representative of a dealer and an investment adviser.

Fast forwarding to 2024,  Westpac was found to have engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction. It will pay the maximum penalty of $1.8 million in relation to the conduct plus $8 million for ASIC’s litigation and investigation costs, and undertake a compliance programme at its own cost.

Regulator focus on conflicts of interest has indeed been long-running and remains ongoing.

What is a conflict of interest?

ASIC defines a conflict of interest as a situation where any or all of a customer’s interests are inconsistent with, or different to, any or all of your organisation’s interests. In other words, the customer’s interests must be considered before and above all others. Where the organisation’s interests are put ahead of the customers, or differ from the customers, there exists a conflict. When conflicts arise, they must be managed effectively. This ultimately strengthens the integrity of the financial services industry.

Financial services licensees have an obligation to manage conflicts of interest that arise within their businesses.

Types of conflicts of interest

In financial services, the concept of conflict of interest goes beyond the actual occurrence of a conflict. ASIC’s guidance refers to three types of conflicts of interest:

• Actual – the conflict of interest has occurred
• Apparent – there appears to be a conflict of interest
• Potential – a conflict of interest could occur

Example of an actual conflict of interest: A financial adviser makes a recommendation to their clients that they purchase shares in a company of which the adviser themselves is a director.

Example of an apparent conflict of interest: A bank – which sells home loans – owns part of a mortgage broking practice that can recommend the bank’s lending products to their own customers.

Example of a potential conflict of interest: An investment bank provides corporate advisory services to a research firm. The research firm publishes performance analysis of the investment bank and its competitors. There is the potential for the research firm to be influenced to publish more favourable reviews of the investment bank in order to receive discounted or preferential corporate services

Conflicts of interest can arise at any time in many circumstances, so you need to be able to identify if there is an actual, apparent or potential conflict of interest and know how to manage it.

Why is it important to manage conflicts of interest?

Adequate management of conflicts of interest helps to minimise the potential adverse impact on clients. Arrangements to manage conflicts help promote consumer protection and maintain market integrity.

Without adequate conflicts management arrangements, licensees whose interests conflict with those of the client are more likely to take advantage of that client in a way that may harm that client and may diminish confidence in the licensee or the market.

Having adequate conflicts management arrangements should also help a licensee ensure that the quality of their financial services is not significantly compromised by conflicts of interest.

It’s important to remember that for conflicts management arrangements to be adequate, they need to be documented, implemented, and enforced.

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Conflicted over conflicts of interest?

FEP has two modes of training covering the topic Conflicts of Interest.

Managing Conflicts of Interest (RG181) is a comprehensive CPD course suitable for representatives, responsible managers, compliance professionals and senior leaders. Learn More.

Our Conflicts of Interest module is part of our regulatory compliance and conduct learning. Contextualised for Financial Services and whole of organisation training. Learn More.