Many broking professionals have moved between insurers and brokerages over their careers and formed true friendships along the way. But when do these relationships create a potential conflict under the Corporations Legislation and how should they address it?
Sarah Scoble, finance and operations manager at Solution Underwriting, dished out some tips on how brokers can manage any conflicts or perceived conflicts of interest.
As AFS licensees, brokerages are legally required to have in place adequate arrangements for managing conflicts of interest that emerge in relation to their activities or that of their representative, Scoble said.
What is considered “adequate arrangements” depends on the nature, scale, and complexity of the licensee’s business.
But what is a conflict of interest?
“Conflicts of interest are circumstances where the interests of insureds are inconsistent with those of the licensee and its employees,” Scoble said. “Importantly, this includes actual, apparent, and potential conflicts of interest. This means that there does not have to be an actual conflict, for a conflict to arise. It could just be that it ‘looks like’ there could be a conflict to an outsider.”
For brokers, one of the most obvious conflicts of interest is where there is a personal relationship between a broker and someone that broker’s company engages with as a business, such as an employee of an underwriting agency or insurer.
“This is because it would be reasonable for an outsider to the business to expect the employee would exhibit some bias because of that relationship,” Scoble said.
But just how “personal” a relationship should it be before it must be notified?
“If you have a drink with an underwriter, for example, that is often part of doing business and does not immediately make it a personal relationship,” Scoble said. “But if a friendship develops, then it may introduce a conflict. It’s not just family relationships that are potential conflicts – it’s any personal/non-business relationship. When in doubt, it’s always better to notify of a potential conflict than not.
“This is not to say you can’t deal with people where personal relationships exist. Having conflicts of interest is a normal part of business. But these conflicts must be noted in a Conflicts Register and arrangements must be in place to deal with any conflicts.”
Once a conflict is detected, managing them generally requires control, avoidance, or disclosure.
“Controlling the conflict may be to ensure you do not place business with the person you have a close personal relationship with, or to not provide services to a particular insured,” Scoble said.
“Disclosure of the conflict to the insured is another means of managing the conflict. If neither of these are options are appropriate your brokerage must avoid the conflict which, at the extreme, would be refraining from providing the affected financial service.”
To ensure compliance with the legislation, it is important for brokerages to have a documented Conflicts of Interest policy and Conflicts Register and to ensure that any conflicts are noted in the register, including the arrangements in place to manage the conflict, Scoble said. It is also required to regularly monitor compliance with the conflicts management arrangements, to ensure “what is said is being done,” she said.
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