Conflict of Interest (COI) was addressed in detail in Board Notice 58 of 2010. Broadly speaking, it aimed to address the provision of incentives like overseas trips and other “extras” with the potential to affect the objectivity of an advisor when recommending products to a client.
COI also features quite prominently in the Retail Distribution Review (RDR) discussion document which proposes “…a set of structural interventions designed to change incentives, relationships and business models in the market in a way that supports the consistent delivery of fair outcomes to customers.”
Concerning commission it states:
“Intermediary remuneration should not contribute to conflicts of interest that may undermine suitable product advice and fair outcomes for customers.”
Board Notice 58 0f 2010 provides that “…a provider and a representative must avoid, and where this is not possible, mitigate any conflict of interest between
- the provider and a client or
- the representative and a client…”
Board Notice 58 of 2010 defines conflict of interest as meaning any situation in which a provider or a representative has an actual or potential interest that may, in rendering a financial service to a client,
- influence the objective performance of his, her or its obligations to that client; or
- prevent a provider or representative from rendering an unbiased and fair financial service to that client, or from acting in the interests of that client.
A reader recently raised an interesting point concerning another example of a reality in the industry which may indirectly influence the objectivity of advice.
I just had one of those dreaded visits from a product provider: “Your production is too low – if it does not improve, we will have to withdraw support.” I have no problem with the Life Office’s business decision. They obviously have costs in servicing my contract. What concerns me is that this is not a “Carrot” inducement to support. It is a “Stick”, and probably far more effective at swaying new business their way than some silly giveaway or lunch.
The irony of this hit me when I was about to place business with another provider, then thought: hold on – maybe I can place it with the company that threatened and help protect myself from withdrawal of support. Withdrawal of support will adversely affect service delivery to all my clients who have that provider’s products in their portfolio.
I have no problem that lunch/dinner/golf/weekend away/ etc. is a thing of the past and I would in any event never let any carrot inducement affect my decision. However, a threat to limit my ability to render appropriate service to my client base is a totally different thing. I am now, for the first time, truly conflicted. Do I do the right thing for this particular client, or the client base as a whole, especially when the difference between provider A and provider B is nominal? In short, my decision-making is now subject to a real COI.
Both providers’ products are good, but B offers superior back-up service. This has swayed me towards them as part of my TCF commitment, and, quite frankly, the enormous amount of additional work I have to do, without compensation, to rectify shoddy service from A.
The question posed above indicates that there is a need for the Regulator to review, not only the incentives dangled by the product providers, but also the pressures they apply to sway the advisor’s choice of product.
There is no easy answer to the dilemma outlined above. Does the threatened withdrawal of support transgress the provisions of Board Notice 58 which, as outlined above, requires that “…a provider and a representative must avoid, and where this is not possible, mitigate any conflict of interest between the provider and a client or the representative and a client…”?
Perhaps, part of the solution lies in what Treating Customers Fairly aims to achieve:
Firms are expected to demonstrate that they deliver the 6 TCF Outcomes to their customers throughout the product’s life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling.