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Committee responds to conflict concerns

The Code Committee has responded to concerns about the conflict of interest requirements in the new version of the code and altered them in the document it has submitted to the FMA.

Monday, December 9th 2013, 6:10AM

by Susan Edmunds

The code went to the FMA for sign-off last week. The regulator has six weeks to do that, after which the Commerce Minister has another six weeks to look at it.

One of the changes in the draft version of the new code was that where a conflict of interest was such that an AFA was able to unable to place the interests of a particular client first, the AFA must decline to act.

That prompted Chapman Tripp senior associate Emma Harding to call for a “reasonableness” provision.

She said that would allow advisers to act for buyers and sellers provided they had suitable protocols to ensure both were treated fairly, sharebrokers to scale allocations of scarce investments between their clients, for disclosed Chinese wall arrangements within firms to deal with conflicts such as an IPO where the broker may be acting for the seller/issuer as a lead manager, and for agreed fee arrangements, even though charging or increasing fees iwas not placing clients’ interests first. “They would rather not pay a fee if they didn’t have to.”

She said: “Without a clarification that at least acknowledges that a reasonable approach would be taken, the code standard would prohibit acting in cases where there is a technical conflict of interest …  It would be better still if the exception included a concept of fairness between all parties.”

Committee chairman David Ireland said the code had been tweaked to focus the standard on situations where advisers were unable to place clients’ interests ahead of their own or of related parties.

He said that would allow advisers to operate in situations such as IPOs, where there were limited numbers of shares and not all clients could be given some. As the code had been written, advisers might have thought they could not offer advice to anyone if they were going to have to choose to give some clients shares ahead of others.

The committee had been thinking about sales situations when it wrote that standard, he said. “But people were saying you’re asking us to send clients away when it’s not in their interests to do so.”

He said the important thing was for advisers to get clients’ consent to act, and to offer full and frank disclosure of what any conflicts of interest might be.

 

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