Mitigating conflict of interest
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2010
Mon
06
Sep
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At a presentation to Moonstone’s compliance officers last week, Rosemary Lightbody, a specialist on the subject of Conflict of Interest (COI), shared some of the strategic drivers aimed at addressing issues which can divert an advisor’s attention away from what is in the interest of the client towards what is more beneficial to the intermediary.
What we are currently seeing is by no means the last words on the matter – there is an international trend away from a principles-based approach to the implementation of more and more rules. The latter of course aims to regulate behaviour via controls, rather than the long-term impact of a mind shift which follows on from people buying into what they believe is the right thing to do.
There are four key dates in the implementation process:
- 19 July 2010: Disclosure of current conflicts
- 19 October 2010: COI compliance FSPs (brokers)
- 19 April 2011: COI Compliance Reps
- 19 April 2011: COI Management Policy must be in place.
One area that has always been a bit grey for me was the prescription that one should “mitigate” conflict when unable to avoid it.
In Ms Lightbody’s presentation she used the following example in the case of a life office:
“A provider may not offer any financial interest to its representative for the following:
- Quantity of business, to the exclusion of the quality of the service rendered to the client. It is not only about the volume of business.
- If they may recommend “external” products, no preference may be given to the life office’s own products. There should be no reward for preference regarding “Mother-ship” products e.g. banc assurance
- If they may recommend more than one product of the same life office, no reward may be given for preference regarding a specific product.”
Let us look at this last point from a practical perspective to get a better grip on mitigation.
My employer may not “reward” me to rather sell endowments than unit trust investments. We have all been part of competitions aimed at boosting sales of certain products when the company discovers that it is behind in sales targets for specific products.
As a tied agent, I cannot offer a variety of products, even if I know that a competitor’s product is superior to the one I am allowed to sell. I can however mitigate this conflict by making sure that I recommend the best product to address the client’s needs, and not the one which gives me the most commission, or qualifies me for prizes in competitions.
But is this fair to the client? Am I acting in his best interest by not telling him so, but rather saying that of the products that I am allowed to advise on, this or that is best suited to your needs?
Sales targets have always been at the heart of productivity and financial soundness of the various sectors of the financial services industry. How product houses are expected to reward quality of service in preference to volumes of business is one question I have no answer to.
Similarly, there may no longer be an unwritten rule that 80% of my business must be placed with company X, failing which I lose benefits which I currently enjoy.
Call me stuck in a rut or whatever you like, but I see more obstacles than solutions in this lot.
Perhaps Paul Simon summed it up best:
The problem is all inside your head she said to me/ the answer is easy of you take it logically/There must be fifty ways to leave your lover.
Most of us can find innovative reasons why a specific product is best suited to a client’s needs without divulging that the benefit to us happens to be the main one.
Rules, and more rules are not going change mind sets – it will merely perpetuate the current status quo.
Source: Paul Kruger: Moonstone Information Refinery (Pty) Ltd
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