As part of ASIC’s focus on culture and conflicts management across the financial services industry it has released Report 474, Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry.
ASIC was specifically concerned about Australian financial services licensees in the funds management industry with multiple business divisions characterised as ‘vertically integrated’.
By ‘vertically integrated’ ASIC means businesses whose operations include at least two of the following functions:
(a) investment management;
(b) acting as a responsible entity or wholesale trustee;
(c) acting as a trustee of a registrable superannuation entity;
(d) operating a platform (e.g. investor directed portfolio services (IDPS) or IDPS-like structures); and
(e) acting as custodian, which may also include an investment administration (back-office) function.
The review did not address the deposit taking, insurance, financial advice and product manufacturing businesses.
The two-stage review involved 12 significant participants in the funds management industry. The review covered the period from 1 July 2013 to 30 September 2015.
In general, ASIC found that financial services organisations demonstrated a commitment to maintaining and reviewing policies and information barriers, with some focus on training.
However, ASIC found that on matters of outsourcing, product selection, remuneration and board membership, there may be areas where financial services organisations could better demonstrate a commitment to managing and, where appropriate, avoiding conflicts of interest.
ASIC’s view is that:
(a) businesses may be adopting a set of policies without sufficiently embedding the expectations of the policies in the business; and
(b) in some instances, conflicts of interest may not have been adequately managed, leading to concerns that an appropriate and, in some cases, necessary outcome may be to restructure business units, roles and remuneration structures to prevent the conflict of interest arising.
The report is worth noting as a record of ASIC’s conclusions and observations of industry practices. It was not an audit of compliance with Regulatory Guide 181 Licensing: Managing conflicts of interest (RG 181).
