ASIC reports on culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry

In ASIC’s campaign to make directors criminally liable for “culture” failings, it has released a report on the conflicts of interest inherent in the vertically integrated funds management industry. A part of the report focuses on performance management and reward systems. These also featured in the discussion at our recent Forum (see HERE).

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, they also 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) Poor culture is both an indicator and driver of poor conduct;

(b) Businesses may be adopting a set of policies without sufficiently embedding the expectations of the policies in the business; and

(c) 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.

This first point above is at least half wrong. As we point out in an opinion piece on the extent that culture should be regulated (see HERE), culture (i.e. attitudes, beliefs and values) is derived from behaviour, and not the other way around. This may be counter intuitive, but is based on decades of consistent behavioural science research.

ASIC identified seven key indicators of culture, in which “tone” from the top figures prominently in the first 3 of these 7 indicators. In this context, “tone” sounds very much like the “vibe of the thing” (recognisable by movie buffs as a memorable line in “The Castle”), but not particularly helpful in a practical sense.

Remuneration and benefits have been identified by ASIC in the past as a key focus for minimising conflicts of interest:

  • Incentives can exacerbate underlying conflicts of interest—for example, by rewarding business development strategies that focus on short-term sales targets or imposing implicit or explicit pressure on the sales force to promote particular products.
  • At an organisational level, conflicts of interest can arise if the licensee receives and is able to retain soft commissions, benefits or fees for services provided or products manufactured by related entities, but such monetary or other benefits are not received for services or products from unrelated entities.
  • At the employee level, a conflict of interest could also arise when similar incentives or an inappropriate remuneration structure encourages the employee to promote group-manufactured products or platform products in priority to a third party’s products, which may not be in the best interests of the client.
  • Better design and alignment of remuneration and transparency that facilitates more rigorous scrutiny by investors, auditors and regulators can mitigate the behaviours and processes that allow a failure to manage these conflicts of interest to become profitable for the licensee or representative and costly for consumers.

It is here that ASIC appears to be on the right track, and could have enlarged upon this to encompass all systemic factors underlying economic reward or punishment, including recruitment, promotion, appraisal, development, career pathing, performance incentives, malus, clawback, whistleblowing,  termination, job grading, recognition, and pay increases.

This paper reported indications that company performance management and remuneration practices can be improved:

  • All organisations stated that, while conflicts management training and compliance is not directly tied to a staff’s performance rating or remuneration, it would be considered as part of the employee’s overall performance and behaviour assessment. For example, non-completion of mandatory learning topics or repeated failure of those topics would be reported to managers and addressed through performance management. Ultimately, training and compliance breaches may be reported to risk and compliance committees.
  • One organisation noted that a serious incident of non-compliance may reduce bonuses or other incentive payments, and may ultimately lead to ineligibility for salary advancement or career progression.
  • Several organisations stated that the remuneration policy itself is subject to a number of guiding principles, including that remuneration structures are supported by a governance framework that avoids conflicts of interest, defines clear accountabilities and ensures that appropriate ‘checks and balances’ are in place.

It was interesting to Guerdon Associates that there was no indication that companies used short-term incentive deferral, with the application of malus for discoveries of non-compliance. This would be easier to manage than factoring in non-compliance as a key performance indicator for the payment of an STI. Compliance, after all, should be part of an individual’s “day job”. Extra money should not be paid for a duty that is expected to be undertaken. It would seem more appropriate for money to be taken away if there was an incidence of non-compliance, followed by termination if it was repeated.

ASIC’s review was not specifically focused on remuneration policies and practices. However, ASIC was concerned that there was limited evidence that remuneration structures adequately consider conduct, compliance training and behaviour as a determinant of remuneration, bonuses, salary advancement or other reward. ASIC considered that compliant behaviour is a key aspect of performance. They warned that they might conduct a further review of remuneration practices in the financial services industry.

The ASIC report can be found HERE. It should probably be read in conjunction with ASIC’s regulatory guide in managing conflicts of interest (see HERE).




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