Moonstone: What does not constitute conflict of interest?
While the Board Notice on “Conflict of Interest” is relatively clear on what is not allowed, it does not provide too much information on what is legally possible, with the possible exception of training, and this too has a number of conditions.
The essence of what this legislation wants to achieve is summarised as follows in “Business management for financial planners” by Lee Rossini and Johann Maree:
“The manner in which conflicts of interest and transparent disclosure are handled contributes to the perceived professionalism of the industry. Financial planners and product suppliers who act in their own interests do not contribute to an image of professionalism.”
With honesty and integrity a corner stone of the regulatory framework, it seems obvious that there should not be any doubt as to what should be disclosed to a client, particularly if there is the slightest suspicion that acting in the client’s interests may be affected by an outside influence, yet it still happens every day.
There is wide variety in the manifestations of this problem – while for instance adding a rider to a policy which is not really justified, or failing to advise the client to review the value of his car annually for insurance purposes may appear insignificant, it does unfairly benefit the advisor. While it is easier to justify small oversights in one’s mind, it does not distract from the fact that it is not right.
‘n Mens kan nie net ‘n bietjie swanger wees nie.
At the other end of the scale there are issues such as offering advisors incentives aimed at inducing them to sell products of a specific provider, rather than what the client actually needs. These include “free” services, overseas trips, preferential underwriting treatment and a myriad of other incentives developed over the years by product houses to promote support from financial advisors. While it is easy to justify the product with the often limited amount of information given to the intermediary, most experienced advisors will know deep down when they have not acted in the interest of the client.
One of the few areas in the COI legislation which does provide insight into what is allowed appears, ironically, as an exception under the definition of “financial interest”, and concerns training. It stipulates that training may be provided and financed, provided that it is “…not exclusively available to a selected group of providers or representatives…” and covers the following:
- Products and legal matters relating to those products
- General financial and industry information
- Specialised technological systems of a third party necessary for the rendering of a financial service
Travel and accommodation associated with such training is, however, excluded. This creates a potential problem in terms of the required knowledge and skills to be able to advise a client correctly. Take for example the tied agent in Springbok who has to attend basic and on-going training in Cape Town. It appears that he will now be liable for his own travel and subsistence costs, which were paid for by his employer in the past.
The restrictions imposed by the conflict of interest legislation impacts a lot wider than just the direct link between product houses and intermediaries.
We met with a director of an events management company recently who organized a wide variety of events such as golf days, prize-givings and other events aimed at rewarding intermediaries, or creating goodwill to the sponsor of the event. There is essentially a moratorium on future events until such time as the real impact of the legislation has been established. Apart from the obvious black or white areas, there are many shades of grey still to be explored, hopefully in the spirit of the legislation, and not to find legal loopholes.
The second leg of the “allowable” financial interests quoted above (General financial and industry information) creates opportunities for product houses to interact directly and indirectly with FSPs.
We had to look at how this legislation would impact on sponsorship of the annual Moonstone Winning Ways seminar, for instance. It appears that it is acceptable for a product house to contribute to the cost of such a seminar organized by a third party as the product provider has no influence about who will attend, nor will they benefit in terms of higher product sales.
While the focus is currently on the regulatory exams, it will in time switch to compulsory continuous professional development which will again create new opportunities for legal interaction between FSPs and product houses.
What is important for the industry is that the “…professionalism of the industry…” as quoted in the introduction above becomes more than merely “perceived”.
Each player, including you and me, has an obligation in this regard
