The parliament of the commonwealth of australia house of representatives corporate law economic reform program

Management of Conflicts of Interests by Financial Services Licensees

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Management of Conflicts of Interests by Financial Services Licensees


4.147 Analysts promote the operation of informed and efficient markets by collecting and analysing information about companies and financial products. The research prepared by analysts helps to filter the wide range of information available to investors about product issuers and investments.

4.148 Analysts may face conflicts of interest that have the potential to undermine their independence and hence the objectivity of research provided to investors. These conflicts are most acute in conglomerate financial services firms that provide services (such as investment banking) to companies they are analysing. In these circumstances, an analyst may be influenced to provide positive research reports about client companies.

4.149 However, the potential for conflicts of interest to arise is not limited to analysts. Financial services licensees and their representatives may also face conflicts of interest that have the potential to undermine their independence, and therefore the objectivity of the service they provide.

4.150 Market failure can result if financial services licensees and their representatives do not manage their conflicts effectively. Therefore it is considered that any new provision requiring the management of conflicts of interest should not apply only to analysts. Rather, it should apply more broadly to financial services licensees, and their representatives.


4.151 The key objective is for financial services licensees and their representatives to manage conflicts of interest effectively, including through transparent disclosure of relevant conflicts, so that the market will have confidence in the integrity of the services they provide. Adequate disclosure of conflicts will assist investors and others in assessing the objectivity of any views provided. This facilitates informed investment decision making and encourages confident participation in financial markets.

4.152 Financial services licensees and their representatives are covered by the licensing, conduct and disclosure regime contained in the Corporations Act. Currently licensees are obliged to ‘do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’. There is no explicit duty in relation to the management of conflicts of interest. However, certain conflicts must be disclosed in relation to retail clients considering whether to acquire financial services or products or whether to act on personal advice.

Options and impact analysis

Option 1

4.153 This option involves retention of the status quo, whereby guidance on the management and disclosure of conflicts by financial services licensees is primarily provided by industry initiatives.

4.154 This option could benefit consumers and the community by promoting industry awareness of independence issues. It could also benefit industry, through the flexible and adaptable nature of a voluntary regime, while incurring no additional Government expenditure or regulatory change.

4.155 The main cost of this option is that the standards might not be sufficiently stringent to ensure that investors are adequately protected and have confidence in the advice they receive. Events such as investigations by United States’ regulators into the impact of investment banking on research have shown that industry self-regulation may not be adequate. The cost to consumers is that existing industry guidelines are not legally enforceable nor externally monitored for compliance, although compliance costs for industry are lower.

4.156 ASIC’s research report into analyst independence, released in August 2003, concluded that Australian industry guidelines had not been adopted as uniformly and closely as is appropriate. Further, ASIC concluded that the industry guidelines are not sufficient to overcome the deficiencies in analyst firm’s management and disclosure of conflicts of interest that it identified in its report.

4.157 A consideration of the costs and benefits suggests that while industry initiatives would continue to play a valuable role, government initiatives might further improve outcomes.

Option 2

4.158 This option involves ASIC providing guidance via a policy statement on the level and manner of disclosure of conflicts required under the general duty to provide financial services ‘efficiently, honestly and fairly’. This approach was originally proposed in the CLERP 9 paper.

4.159 This option could be expected to result in higher standards than relying on industry initiatives alone. In addition, ASIC could link its guidance to the general duty to act ‘efficiently, honestly and fairly’. This could facilitate enforcement action by ASIC under the licensing regime against licensees. Consumers could benefit from more transparent disclosure of conflicts. A collaborative approach is also a more flexible and less costly means of influencing business practices than additional prescriptive legislative rules.

4.160 There would be costs associated with ASIC developing and administering further guidance, although consultation with industry would help to minimise these costs. Principles-based guidance, which is flexible enough to accommodate different operating structures and overseas developments, is unlikely to impose substantial compliance costs on industry.

4.161 ASIC guidance, developed in consultation with stakeholders, would help to ensure an appropriate response to managing conflicts of interest and this would benefit consumers without imposing unnecessary compliance costs on industry.

Option 3

4.162 This option involves introducing in the law an additional duty in relation to the management of conflicts of interest to supplement the general duty to provide financial services ‘efficiently, honestly and fairly’.

4.163 A conflicts management duty would be in addition to the ‘efficiently, honestly and fairly’ duty. Introducing an additional duty would provide a stronger legislative backing for any guidance issued by ASIC, while being consistent with the Government’s principles-based approach. This would make it clearer that ASIC could take enforcement action rather than relying on compliance with the general duty. It could promote certainty by making each licensee’s responsibility for managing conflicts of interest clearer on the face of the legislation.

4.164 It is unlikely to impose additional obligations on most licensees, because licensees are already expected to manage conflicts (either as part of the general duty or a matter of best practice). Both an additional duty and ASIC guidance may impose a higher cost on licensees not currently managing conflicts of interest adequately. However, ASIC guidance would be worthwhile in terms of enhanced enforcement and investor confidence.

4.165 On balance, an additional duty would clarify and reinforce the overriding obligation to manage conflicts of interest by supplementing the general duty to act ‘efficiently, honestly and fairly’.


4.166 Industry supported a principles-based approach. The main concerns expressed were that any additional obligations not require the breaking up of conglomerates and not impose detailed prescriptive guidelines on industry.

4.167 The CLERP 9 proposal for further ASIC guidance, in conjunction with effective industry initiatives, received strong support from industry. This approach involved general duties and guidance rather than a heavily prescriptive approach. It was considered that stakeholders could actively contribute to ASIC’s consultation process to ensure the guidelines effectively address analyst independence and conflict management issues.

4.168 ASIC supported the addition of a specific licensing obligation to manage conflicts as a means of enhancing its capacity to remedy inadequate conflicts management practices.


4.169 ASIC guidance, supported by a specific licensing obligation in relation to the management of conflicts of interest, will deliver a market based solution for managing conflicts of interest. This will benefit consumers by improving industry standards. An additional duty in relation to the management of conflicts will supplement the general duty to act ‘efficiently, honestly and fairly’ and provide a firmer legislative basis for the development of ASIC guidance. These initiatives will ensure that conflicts of interests are managed effectively.

4.170 The effectiveness of ASIC guidance should be monitored after there has been some experience with its operation. This would provide an opportunity to consider whether any further legislative changes are required.

Informed Market


4.171 The Government aims to promote an informed market for financial products (such as shares, debentures and managed investment products) through disclosure requirements that apply to the issuers of these products.

4.172 These disclosure requirements are intended to address information asymmetries between product issuers and investors. In the absence of these requirements, issuers of financial products may withhold adverse information from investors or selectively disclose materially price sensitive information about their products to particular investors. In addition, the nature of financial products means that investors may be unable to obtain the information that they require to make an informed decision about whether to acquire or dispose of a financial product. Alternatively, the overall cost to investors of compiling this information may greatly exceed the cost to an issuer of obtaining and disseminating the same information.

4.173 Disclosure requirements are intended to facilitate confident investor participation in financial markets (especially in relation to so called ‘retail investors’) by ensuring that investors have equal and timely access to the information necessary to evaluate investment opportunities (as well as to determine whether a particular investment is suited to their needs).

4.174 Disclosure requirements are also intended to ensure that shareholders are properly informed in relation to their rights to participate in, and exercise voting rights at, company general meetings. This enables shareholders to influence the direction of companies in which they invest.

4.175 It is important to ensure that disclosure requirements are not too burdensome for issuers so that they increase the cost of capital. It is also necessary to ensure that disclosure requirements achieve an appropriate balance between the need to maintain an informed market and the need to safeguard the commercial performance of issuers by allowing them to withhold information whose disclosure might be commercially detrimental.

4.176 CLERP 9 examined three aspects of disclosure by product issuers:

  1. fundraising provisions that generally apply when financial products are first issued to retail investors (as well as in certain secondary sale situations);

  2. continuous disclosure provisions (which apply to product issuers that are disclosing entities and require them to disclose materially price sensitive information on an ongoing basis); and

  3. shareholder disclosure in relation to company meetings and resolutions.



4.177 The Bill addresses three issues in relation to the disclosure requirements governing fundraising.

  1. Difficulties encountered by retail investors in easily comprehending the contents of prospectuses and other disclosure documents.

  2. Additional compliance costs associated with the need for issuers of continuously quoted managed investment products to disclose information that has already been made publicly available and therefore readily available to investors.

  3. Excessive limitations on financial institutions that receive wholesale placements of financial products to on sell these products to retail investors within 12 months without a disclosure document.

4.178 It is considered Government legislative action is needed to correct these problems because they relate to requirements set out in the fundraising provisions of the Corporations Act.


4.179 The objective of the fundraising provisions is to facilitate confident investor participation in Australia’s primary securities market without imposing unduly high costs on issuers (thereby increasing the cost of raising equity capital).

4.180 The fundraising provisions are contained in Chapters 6D and 7 of the Corporations Act and are administered by the Australian Securities and Investments Commission (ASIC). The provisions of Chapter 6D apply to shares and debentures and, with some exceptions, Part 7.9 applies to all other financial products.

4.181 The fundraising provisions require offers of financial products to retail/unsophisticated clients to be accompanied by a disclosure document that contains information relevant to the offer. These clients are unsophisticated in financial markets and receive additional protection under the Act, principally through the disclosure of relevant information to enable the client to make an informed choice about the financial product in question. They specify the information that is required to be contained in disclosure documents and provide penalties and other remedies for inadequate disclosure.

4.182 The fundraising provisions only apply to offers to retail clients. They do not apply to offers made to wholesale clients (such as financial institutions) as these persons are deemed to be able to safeguard their own interests without the need for mandatory disclosure.

4.183 These amendments are intended to improve the practical operation of the fundraising provisions in line with the Government’s intention to ensure investors are fully informed when making investment decisions.


4.184 It was considered that the problems identified in relation to the fundraising regime could only be addressed through legislative amendments.

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