Independent Research and Policy Advocacy

An Emphasis on Eliminating Conflict of Interest

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Our earlier post covered the first of the three approaches to consumer protection that were discussed in the IFMR Financial Systems Design Conference 2012. This post carries details of the session that discussed a framework for consumer protection based on eliminating conflicts of interest.

This approach believes that the root of mis-sale of products and services is the conflict of interest between the manufacturer and distributor of financial services. It attempts to align incentives within a financial service provider or across providers involved in developing and delivering a service.

Conflicted remuneration1 means any benefit, whether monetary or non-monetary, given to a financial service licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:

• might influence the choice of financial product recommended by the licensee or representative to retail clients; or
• might otherwise influence the financial product advice given to retail clients by the licensee or representative

Susan Thomas, Professor at Indira Gandhi Institute for Development Research (IGIDR) provided research based insights on the topic. Her presentation covered the problems of incentive alignment, costs of incentive misalignment and regulatory approaches to contain conflicts of interest. The presentation also discussed the various proposals that have been made to eliminate conflicts of interest. One approach that was discussed was based on the paper ‘A Regulatory approach to financial product advice and distribution’ to separate out advice from the sale, such that the advisor is independent of the manufacturer. This paper calls for an industry body which recognizes financial advisors as professionals and regulates them. Some implementation approaches -a series of business models to implement in the current framework and implementing guidelines were also discussed.

Click here for the Presentation.

1 – Section 963A, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 available at http://www.comlaw.gov.au/Details/C2011B00265

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2 Responses

  1. The conflict of interest issue will be difficult to resolve when consumers will not pay separately for advise. Since the source of the fee is linked to the sale/purchase of the financial product, a separate category of advisors will not be a viable business. What could help is if the track record of advisors is made transparent. For example, advisors/agents may be asked to fill in their predicted growth trajectory for the investments in terms of returns and time horizon. This can be built into a data base that creates an objective ranking of advisors, that the regulator can monitor. The form can be co-signed by the investor. The ranking will factor in advisors’ success rate vis-a-vis recommendations PLUS their relative acument vis-a-vis other advisors. This could translate eventually into a separate market place for advisors, as good ones establish a brand. Regulatory measures such as the one outlined undertaken in the US / UK etc will have limited utility as long as the source of revenue is the customer. The regulator can cover the cost of managing these retail advisories through an overall fee charged on the financial investment seller.

  2. The conflict of interest issue will be difficult to resolve when consumers will not pay separately for advise. Since the source of the fee is linked to the sale/purchase of the financial product, a separate category of advisors will not be a viable business. What could help is if the track record of advisors is made transparent. For example, advisors/agents may be asked to fill in their predicted growth trajectory for the investments in terms of returns and time horizon. This can be built into a data base that creates an objective ranking of advisors, that the regulator can monitor. The form can be co-signed by the investor. The ranking will factor in advisors’ success rate vis-a-vis recommendations PLUS their relative acument vis-a-vis other advisors. This could translate eventually into a separate market place for advisors, as good ones establish a brand. Regulatory measures such as the one outlined undertaken in the US / UK etc will have limited utility as long as the source of revenue is the customer. The regulator can cover the cost of managing these retail advisories through an overall fee charged on the financial investment seller.

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