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The step by step to conflict of interest readiness

10 September 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The FAIS Conflict of Interest (COI) legislation can be dividend into four phases. The first implementation date was on 18 July 2010 – with the next milestone pencilled in for 18 October. As the second deadline looms, both product providers and financial s

Phase 1 Client disclosures – July 2010

If you haven’t tackled the client disclosures section of COI then you’re contravening the law, because the 18 July cut off has already come and gone. In preparing for this date Liberty focused on the interaction between their representatives, policyholders and other clients. The biggest challenge for a company with a large “tied” agency force is you end up knocking your head against the ‘one size fits all’ and tailor-made disclosures the regulators frown upon. Dewey said they reached a compromise by creating a standard disclosures template and including a “free format” section. She also acknowledged there were less possible conflicts in a “tied” agency force than at FSPs.

Phase 2 FSP Incentives – October 2010

“The prohibition on FSP incentives that aren’t specifically recognised as ‘permissible’ kicks in on 18 October 2010,” said Dewey. Liberty undertook a massive group-wide exercise to make sure they considered every incentive imaginable. We created a template and listed every component of the definition of financial interest, including cash, commission, discounts, benefit in advantage etc, and also listed every imaginable issue around ownership interests and third party relationships. This template was then distributed to each business unit with the request they complete a separate document for each Liberty distribution channel (agency, broker or franchise) they dealt with.

These business units were instructed to list every element of the value proposition. For brokers they’d even list items such as training, documentation and moral support. A specific request was sent to the business units NOT to consider COI at this stage. Says Dewey: “We wanted to get a complete picture before conducting an analysis to test each item.” Only then did they determine whether each item was permissible in terms of S3 (1) (a).

Large insurers like Liberty Life have to consider their dual role as product provider and FSP. It becomes essential for the insurance division to consider the benefits received from other business units, for example. “The Liberty distribution force forms part of the life operations, but is a FSP with regards other group product they deal in,” she said.

Phase 3(a) Representative remuneration – April 2011

Liberty used the template from phase 2 to determine the “cash and kind” representative benefits. The financial interests declared by each business unit were carefully scrutinised for permissibility in terms of the relevant section of the COI code, S3A (1) (b). The specific tests applied to each financial interest include whether it gave preference to quantity to the exclusion of quality and whether it gave preference to a specific product. There are always teething troubles with new legislation. Dewey said the concept of quantity and quality would still have to be explored – as well as whether “preference” would arise if the products sold addressed non-competing needs.

Phase 3 (b) Conflicts management policy – April 2011

Although the management policy need only be in place by April next year, big listed companies need to prepare well in advance. Liberty tackled this requirement in parallel with the second phase already mentioned, and with due consideration for the board’s timetable. There are some big decisions that need to be made, opined Dewey. These include:

· How to disclose “type and basis” of representative benefits;

· How to meaningfully disclose associations;

· What appropriate media to publish in; and

· How much detail to use, balancing the need for transparency against confidentiality and competition concerns.

A trial by media

Liberty has learned a number of lessons in preparing for the various stages of COI. They say much of the regulation is untested and warn of uncertainty in some areas. According to Dewey the best way to deal with any interpretation issue is to consider the intent of the Code, with specific attention to the requirements of S3 (b). A product provider or brokerage can also apply two commonsense tests if they hit a brick wall. The first is the “Saturday Star” test – if you’re going to rely on a particular interpretation, would you be able to defend your position in the media? And the second is to turn to Treat Customers Fairly (TCF) principles. “The core principles of TCF are a useful yardstick to apply when you’re in doubt.”

You can expect COI to be aggressively policed by both the regulator and your competitors, and any abuse through associates is likely to be flushed out fairly early in the game. Dewey also mentioned the ease with which regulators could modify the Code. It doesn’t help to seek out loopholes which will be plugged very easily.

Editor’s thoughts: Four years after the FAIS Act went “live” professionals in the financial services industry are still being kept on their toes. Conflict of interest regulations and treating customers fairly requirements will require continued changes to the way in which business is conducted. What impact has Conflict of Interest had on your practise thus far? Add your comments below, or send them to

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