Question

Can you briefly talk about conflict of interest financial advisers are facing in the industry right now. Also,.give thoughts on practical solutions for mitigating the effects of the conflict of interest of these financial advisers.

Answer 1

A conflict of interest arises when you have a personal interest, or have a duty to another person which is in conflict with the duty owed to your client in your capacity as a registered tax (financial) adviser.The Code of Professional Conduct (Code) applies to the conduct of a tax (financial) adviser when providing tax (financial) advice services (as opposed to financial services).

The Code requires you to have adequate arrangements in place for managing conflicts of interest that may arise relating to the activities that you undertake as a registered tax (financial) adviser. This is item 5 of the Code. However, the Code does not prohibit you from having conflicts of interest.

A conflict of interest may be an actual conflict or a potential conflict and it can arise before you accept an engagement or at any time during the engagement. You have a duty to manage to both actual and potential conflicts of interest.\

Mitigating the effects of the conflict of interest of these financial advisers are as follows :

You should use your professional judgment to determine the most appropriate method to identify and manage a particular conflict of interest. A number of mechanisms could be used, such as:

• avoid – you may decide to decline to act for the client in situations where you will be unable to manage the conflicts of interest regardless of arrangements put in place

• control – this involves identifying, assessing, evaluating, deciding and implementing an appropriate response to manage conflicts of interest. For example, depending on the particular circumstances, you may be able to control a conflict of interest by isolating the persons in your practice who will provide the relevant advice from those who are privy to the material information which may influence the advice

• disclose – you should sufficiently disclose conflicts of interest to your clients in a manner which will enable them to make an informed decision and give them a reasonable time to assess how the conflict may affect the services being provided and about its management.

Example 1 – Personal gain from a referral creates a conflict of interest

Scenario

Anthony is a long-time client of Lucia’s, a registered tax (financial) adviser. Anthony asks Lucia to assist him to identify an appropriately qualified tax agent to provide advice in relation to tax matters. Lucia is aware of a number of suitable registered tax agents but refers Anthony to XYZ Accounting Pty Ltd because she receives a financial incentive for the referral to this firm.

Conflict of interest

Lucia has a financial incentive in referring Anthony to XYZ Accounting Pty Ltd as opposed to another registered tax agent and, therefore, has a conflict of interest in the circumstances.

Managing the conflict of interest

Lucia appropriately identifies and discloses her conflict to Anthony by advising him that she will receive a financial incentive if he engages the services of XYZ Accounting Pty Ltd. In this case, Lucia has satisfied her obligations under Code item 5 by disclosing her conflict of interest to Anthony, when referring him to XYZ Accounting Pty Ltd.