Moonstone: Conflict of interest episode II

Last week we discussed the elements contained in the definition of Conflict of Interest (COI) which reads as follows:

conflict of interest means 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,

(a) influence the objective exercise of his, her or its obligations to a client; or

(b) prevent a provider or representative from rendering an unbiased and fair financial service, or from acting in the interests of a client, including, but not limited to

(i) a financial interest;

(ii) an ownership interest;

(iii) any relationship with a third party;

This week we look more closely at what is meant by a financial interest:

" A provider or its representatives may only receive or offer the following financial interestfrom or to a third party

i. commission authorised under the Long-term Insurance Act, 1998 (Act No. 52 of 1998)or the Short-term Insurance Act, 1998 (Act No. 53 of 1998)

ii. commission authorised under the Medical Schemes Act, 1998 (Act No. 131 of 1998)

iii. fees authorised under the Long-term Insurance Act, 1998 (Act No. 52 of 1998), the Short term Insurance Act, 1998 (Act No. 53 of 1998) or the Medical Schemes Act, 1998 (Act No. 131 of 1998), if those fees are reasonably commensurate to a service being rendered;

iv. fees for the rendering of a financial service in respect of which commission or fees referred to in subparagraph (i), (ii) or (iii) is not paid, if those fees

(aa) are specifically agreed to by a client in writing; and

(bb) may be stopped at the discretion of that client;

v. fees or remuneration for the rendering of a service to a third party, which fees or remuneration are reasonably commensurate to the service being rendered;

vi. subject to any other law, an immaterial financial interest; and

vii. a financial interest, not referred to under subparagraph (i) to (vi), for which a consideration, fair value or remuneration that is reasonably commensurate to the value of the financial interest, is paid by that provider or representative at the time of receipt thereof.

Two aspects require comment:

fair value is not left to the discretion of the provider but is defined as: having the meaning assigned to it in the financial reporting standards adopted or issued under the Companies Act, 1973 (Act No. 61 of 1973)and

Fees are now more closely defined to address abuses committed in the past, but one has to wonder who decides what is reasonably commensurate, and whether the judgment thereof at the time a complaint arises will be the same as at the time of the transaction.

Next week look more closely at the limitations placed on product providers to prevent them from influencing an advisors judgment via the provision of financial incentives.