Conflicts of interest abound in the financial services industry, but it’s not always easy to recognise what is fair or ethical, and what is immoral or illegal.

Players in the industry need to exercise caution because trust is crucial in financial services, and your reputation is an important asset. The cost of damage to your reputation can often never be recovered.

General Code of Conduct Product providers can no longer wine and dine the brokers who sell their products because this affects the brokers’ ability to give objective advice.

The Financial Services Board has now introduced amendments to the General Code of Conduct for Authorised Financial Services Providers and their Representatives (FAIS Act), which addresses concerns regarding conflicts of interest between financial services providers, brokers, and clients.

According to Seamus Casserly, President of the Financial Intermediaries Association of Southern Africa (FIA), the FIA is “declaring war on inadequate financial advice and unethical behaviour.

“Brokers will be forced to choose whether they represent the insurer as a broker and product supplier, or whether they act as an independent intermediary, placing the business with the supplier that best suits their customer’s particular circumstances.”

The FIA defines a conflict of interest as, “a situation in which financial or other personal considerations have the potential to compromise or bias professional judgement and objectivity.”

In terms of what is considered “financial or other personal considerations”, the following have been prohibited – cash or cash equivalents such as vouchers, gifts, or services; benefits such as discounts, domestic or foreign travel, or hospitality; accommodation; sponsorship; and any other free services. Training is only acceptable insofar as it’s not made exclusive to some financial service providers over others.

What this essentially means is that product providers can no longer wine and dine the brokers who sell their products because this affects the brokers’ ability to give objective advice.

And in the provision of financial services, it’s imperative that providers and representatives act objectively in the interests of their clients. In order to maintain trust, transparency is key.

Full disclosure

“The original legislation required levels of transparency and disclosure; however, there was not a clear strategy to determine what needed to be disclosed and how this should be done, with the result that the disclosure of conflicts of interest was not made consistently throughout the industry,” says Casserly.

The amended act requires that a provider or representative must disclose to a client any actual or potential conflicts of interest in writing at the earliest opportunity. This enables the client to assess for themselves whether the advice they are receiving is biased or unduly influenced.

According to Casserly, “Financial services providers will now have to have a documented policy on conflict of interest, which has to be monitored on an ongoing basis. In addition, they also need to keep and maintain a register in which all actual or even potential conflicts are recorded.”

This policy will need to be made accessible to clients, and detail the conflicts that exist, what has been done to avoid these conflicts, and how the provider should comply.

The risks of non-compliance

It may take some getting used to – many of the benefits previously enjoyed for free will fall away. But providers may be subject to financial penalties and brokers could lose their FAIS license. The act does not dictate that brokers cannot have a good standing with service providers, but instead that these relationships are not supplemented with other benefits.