Time to Review your Conflicts of Interests Management – ASIC Report 742

ASIC’s Report 742 Managing conflicts of interest in wholesale financial markets (“REP742”) summarises the findings of ASIC’s thematic review of arrangements used by participants in relation to conflicts of interest management.

Although the report’s genesis is large institutions, it has take-aways that can assist all AFS Licensees when managing conflicts.  REP742 was produced after ASIC conducted a three-year review of five large Australian financial service licensees (“AFS Licensees”), and identifies what ASIC considers to be better and poorer practices in six key areas when managing conflicts of interest in wholesale financial markets.

We examine the six key areas discussed in REP742 and include questions that AFS Licensees should ask and test their current conflicts of interest management framework.

 

How is this relevant to you?

If you are an AFS Licensee, you are required under section 912A(1)(aa) of the Corporations Act 2001 (Cth) to have in place adequate arrangements for managing conflicts of interest. REP742 complements ASIC’s existing regulatory guidance on conflicts management arrangements.

Note that better practices referenced in the report and in this blog may exceed the minimum standards required by law. What constitutes adequate conflicts management arrangements will depend on the nature, scale and complexity of the AFS Licensee’s business.

What about the six key areas of concern identified in REP742?

Approach to conflicts managementPoorer practice• Approaches that were reactive to incidents and regulatory inquiries; where controls were ad hoc and not mapped to specific risks.
Better practice• Approaches that were proactive in identifying, assessing and managing specific conflicts arising within each business and across the group.
Questions to ask yourself• Have you clearly articulated your risk appetite for conflicts of interest with sufficient details so it can be used effectively when assessing whether or not certain activities are within your risk tolerance?

• Is ‘conflicts of interest’ captured under general categories of your risk matrix/register so that the management of these risks are ad hoc and reactive?

• Is your senior management able to explain how conflicts management apply to their day-to-day business or any specific controls embedded?

• Are you relying on your front office staff to make judgement on whether commercial and/or transactional conflicts are to be reported? Are these decisions to report documented and/or independently reviewed?
Effectiveness of policies and procedures Poorer practice • Broadly drafted policies and procedures which led to confusion when applied to specific business activities and mismanagement of conflict
Better practice • There were sufficient details for staff to understand how to identify and appropriately manage conflicts that may arise in ordinary business and employee behaviours
Questions to ask yourself• Have you given broad exemptions for a range of transactions from conflict clearance process and wide discretion to your front office staff regarding reportable business activities?

• Is your Conflicts of Interest Policy sufficiently detailed so staff members have certainty in how conflicts should be managed?

• Is your Conflicts of Interest Policy stored in a centralised library so that staff members are sure where to source the document when needed to?
Robustness of information barriersPoorer practice• Failed to appropriately restrict access to confidential information.
Better practice • Designed and implemented robust information barriers which were continuously aligned to current business models and activities.
Questions to ask yourself• Are your sales and trading teams co-located side by side in the same seating rows so private conversations could be overheard or computer screens seen?

• Are you effectively managing the ability and authority to access certain information by your staff members?

• Do you have systems to identify unauthorised access to databases storing confidential information?
Effectiveness of staff training and awareness Poorer practice• Low levels of awareness of conflicts likely to arise across both public- and private-side businesses. Training was generic and not sufficiently tailored to the specific needs of the business.
Better practice • Conducted learning needs assessments and bespoke training on specific business activities using practical scenario.
Questions to ask yourself• Do you require your staff members to attend specific training on conflicts of interest management?

• Are the conflicts of interest training you require your staff member to attend include sufficient information on the potential harm of conflicts of interest to clients, counterparties or the markets?

• Would you say that your staff members have a moderate or high level of awareness of conflicts of interest management in their day-to-day business activities?
Approach to governance and supervision Poorer practice • A lack of governance committees that regularly convened to consider conflicts and immature control functions that lacked resourcing, competency and clear roles and responsibilities in relation to conflict management
Better practice • Clear channels to escalate conflicts to committees, with clear ownership and accountability in their terms of reference.
Questions to ask yourself • Do you have a conflicts committee?

• Are meetings convened regularly with senior management’s engagement?

• In relation to the issues identified by your conflicts committee, are any of these issues repeatedly identified?

• Do you have a centralised incident register for recording conflict issues?
Operation of the control room function Poorer practice• Poorly resourced control rooms that were reliant on manual processes, where staff spent more time on data entry and record-keeping than assessing and responding to commercial and transactional conflicts
Better practice• Proactive monitoring and challenging of front-office business activities by control room staff
Questions to ask yourself • Are you heavily reliant on manual data entries into the control room workflow systems?

• Is there a quality assurance review process for information recorded in control room registers?

• Does your control room have sufficient resourcing to keep pace with key changes in risk profiles and business models across the group?

• Do you have high turnover in control room stuff, with roles remaining vacant for an extended period?

• Have you invested in technology systems that allows you to automate repetitive processes?

• Is there regular communication within the monitoring and surveillance team?

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