How you treat Conflicts of Interest is crucial to Governance
What should a board be aware of regarding conflict of interest obligations?
Introduction
Boards, Responsible Managers and Compliance Managers of Australian Financial Services Licence (‘AFSL’) holders need to be aware of the critical obligations around managing conflicts of interest. These conflicts, if unmanaged, can undermine investor trust, compromise financial services standards and lead to significant regulatory consequences.
The Australian Securities and Investments Commission (‘ASIC’) has provided detailed guidance on how AFSL holders are expected to identify, manage, and disclose conflicts of interest. These expectations are a central part of demonstrating compliance with licence obligations under the Corporations Act 2001.
Recent enforcement activity and surveillance by ASIC have made it clear that proper conflict management frameworks are an area of increasing regulatory focus. In fact, ASIC recently confirmed that it will be looking to update ASIC Regulatory Guide 181 Licensing: Managing conflicts of interest (‘ASIC RG 181’).
What is a Conflict of Interest?
A conflict of interest arises when an AFSL holder, or any of its representatives, has competing duties, obligations, or personal interests that may influence the advice or service provided to a client.
Common examples include:
Receiving commissions or incentives from product issuers for recommending particular products.
Situations where an advisor recommends products issued by a related entity.
Company directors making decisions where they hold a personal or financial interest.
Conflicts can be:
Actual – where the conflict is currently impacting the director, Responsible Manager or advisor’s judgment.
Potential – where the conflict could arise in future.
Perceived – where a reasonable person may believe a conflict exists, regardless of whether it does.
What does ASIC expect?
ASIC RG 181 outlines ASIC’s expectations for AFSL holders, which are structured around three key obligations:
1. Identify and control the conflict
AFSL holders should have systems to identify and assess all types of conflicts of interest - actual, potential, and perceived. These systems include internal procedures, training and having a culture of transparency to adequately assess the conflict and to then implement appropriate controls.
2. Avoid the conflict
Wherever possible, conflicts should be avoided altogether, particularly where they are likely to result in poor client outcomes or impaired judgment.
ASIC has indicated that simply disclosing a conflict may not be enough to protect client interests and some conflicts must be eliminated entirely if they pose too great a risk to a client’s outcome.
3. Disclose the conflict
If a conflict cannot be avoided, it must be controlled through robust policies and governance frameworks and clearly disclosed to the client.
Disclosure should be:
Clear and free of jargon.
Timely, so clients can make an informed decision.
Specific, detailing the nature of the conflict and its potential impact.
Fairness
ASIC also states that AFSL holders have an obligation to deliver their services and to treat their clients efficiently, honestly and fairly under the provisions of s912A(1)a of the Corporations Act. ASIC broadly expects this to mean that:
Licensees do not unfairly put their interests above those of their clients.
Licensees do not unfairly put the interests of some clients ahead of others.
Licensees do not use client information to advance their own interests.
Why it matters to your AFSL
The obligation to manage conflicts of interest arises from section 912A(1)(aa) of the Corporations Act, which requires AFSL holders to have ‘adequate arrangements’ for managing conflicts.
ASIC may take action where it finds:
Conflicts that are not disclosed appropriately.
Remuneration structures that lead to poor advice.
Inadequate internal policies or oversight by the board.
For example, ASIC has penalised firms where product recommendations were influenced by ownership arrangements or volume-based incentives, rather than the client’s best interests.
The role of boards and Responsible Managers
AFSL boards and Responsible Managers have a responsibility to set the tone from the top regarding conflict management. This means:
Embedding a culture of client-first thinking.
Regularly reviewing and updating the AFSL’s conflict of interest policy.
Overseeing training for staff on identifying and managing conflicts.
Ensuring that disclosure practices are in line with ASIC’s expectations.
Boards should also maintain a register of conflicts and ensure this register is reviewed and acted upon as part of the board’s compliance monitoring.
Conclusion
The AFSL holder’s board and Responsible Managers are ultimately accountable for how conflicts of interest are managed. ASIC expects proactive governance and clear accountability for ensuring that client interests are never compromised by misaligned incentives or poor internal controls.
If your board is uncertain whether your current conflict management framework meets ASIC’s expectations, or if you require support with the implementation and review of your policies, please contact me to discuss how I can assist your board with structured guidance, governance and compliance support.
https://www.andrewsmcneil.com/