In this article, partner Sean McMahon explores the issues around conflicts of interest inherent in our financial services industry.
The law is a blunt instrument when developing and enforcing moral behaviours on commercial players. It is this tension that underpins the findings of the Banking Royal Commission and the APRA report into the CBA. The laws that have been breached require businesses to provide their services "efficiently, honestly and fairly" in the best interests of consumers. These concepts are not easy to apply in practice.
The Royal Commission commissioned a report from a US professor about the conflicts of interest inherent in our financial services industry. The report concludes it is extraordinarily difficult to manage conflicts of interest through disclosure, and the only effective method of ensuring the consumer receives the right product and the right advice is to legislate for conflicts to be avoided entirely.
The difficulties inherent in ensuring financial services are provided in the best interests of the consumer, and efficiently, honestly and fairly would be much easier if the commercial players did not have an inherent need to profit through payment received from other players in the system. If ultimately the consumer must pay for advice, then foreseeably, the cost of that advice will become prohibitive for the members of the public who most need it.
We agree that, in a traditional sense, these conflicts cannot be effectively managed through proper disclosure and have not been working. The no-conflict rule and no-profit rule are the two limbs upon which all fiduciary obligations stand. Product issuers, and in certain cases, advisers, are not fiduciaries to the consumer in relation to the provision of advice or the provision of products. However, the development of legislation, including the proposed design and distribution obligations, is moving toward putting increasing obligations on those parties to ensure the products being sold to consumers meet their needs and are appropriate for their circumstances.