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Having adequate arrangements for managing conflicts of interest for tax (financial) advisers exposure draft D35/2016

Exposure draft
TPB Information Sheet TPB(I) D35/2016

Code of Professional Conduct – Having adequate arrangements for managing conflicts of interest for tax (financial) advisers

 This exposure draft is also available as a PDF – TPB(I) D35/2016 Code of Professional Conduct – Having adequate arrangements for managing conflicts of interest for tax (financial) advisers (413 KB)

 Tax Practitioners Board exposure draft

The Tax Practitioners Board (TPB) has released this draft Information Sheet as an exposure draft and invites comments and submissions in relation to the information contained in it within 45 days. The closing date for submissions is 11 July 2016. The TPB will then consider any submissions before settling its position, undertaking any further consultation required and finalising the Information Sheet. 

Written submissions should be made via email at tpbsubmissions [at] tpb.gov.au or by mail to:

Tax Practitioners Board
GPO Box 1620
SYDNEY NSW 2001

DISCLAIMER

This document is in draft form, and when finalised, will be intended as information only. While it seeks to provide practical assistance and explanation, it does not exhaust, prescribe or limit the scope of the TPB’s powers in the Tax Agent Services Act 2009 (TASA). The principles and examples in this paper do not constitute legal advice. They are also only at a preliminary stage. The TPB’s conclusions and views may change as a result of comments received or as other circumstances change. 

Document history

This draft Information sheet was issued on 25 May 2016 and it is based on the TASA as at 8 March 2016.

Introduction

  1. This draft Information Sheet (TPB(I)) has been prepared by the Tax Practitioners Board (TPB) to assist registered tax (financial) advisers to understand their obligations under subsection 30-10(5) of the Tax Agent Services Act 2009 (TASA) (Code of Professional Conduct (Code) Item 5). [1] While the focus of this draft TPB(I) is on Code item 5, it is also important to note that there are 13 other items in the Code and additional requirements in relation to being a ‘fit and proper’ person which may also be relevant. [2]
  2. In this draft TPB(I), you will find the following information:
    • what is the obligation under Code Item 5 (paragraphs 3 to 22)
    • consequences for failing to comply with Code Item 5 (paragraphs 23 to 27)
    • comparison with the Corporations Act 2001 (Cth) (Corporations Act) (paragraphs 28 to 35)
    • practical examples (paragraph 36)
    • consultation questions for stakeholder feedback (paragraph 37).

What is the obligation under Code Item 5?

  1. Code Item 5 requires registered tax (financial) advisers (and tax and BAS agents) to have adequate arrangements in place for the management of conflicts of interest that may arise in relation to the activities that they undertake in their capacity as a tax (financial) adviser. However, the Code does not apply to the conduct of a tax (financial) adviser when providing financial services (as opposed to tax (financial) advice services).
  2. Code Item 5 does not prohibit tax (financial) advisers from having conflicts of interest but rather creates an obligation to appropriately manage conflicts that arise or may arise.

What is a ‘conflict of interest’?

  1. A conflict of interest is where a tax (financial) adviser has a personal interest, or has a duty to another person, which is in conflict with the duty owed to the client.
  2. A conflict of interest may be an actual or potential conflict. Also, it can arise before the tax (financial) adviser accepts an engagement or at any time during the engagement. A tax (financial) adviser has a duty to manage actual and potential conflicts of interest.
  3. An actual conflict of interest arises where a tax (financial) adviser has multiple interests and cannot objectively and impartially act in one of the interests.
  4. A potential conflict of interest arises where a tax (financial) adviser has multiple interests and one interest could possibly impact the motivation to act for another interest.

What are ‘adequate arrangements for the management of conflicts of interest’?

  1. Tax (financial) advisers must have adequate arrangements to identify and manage conflicts of interest that arise or may arise. A determination of whether conflict management arrangements employed by a tax (financial) adviser are sufficiently adequate will be a question of fact having regard to the particular circumstances of the matter in question.
  2. A number of mechanisms could be used to manage a conflict and it will be up to a tax (financial) adviser to exercise their professional judgement to determine the most appropriate method for managing a particular conflict of interest.
  3. Three mechanisms that tax (financial) advisers may use to manage conflicts of interest are:
    • avoiding conflicts of interest;
    • disclosing conflicts of interest; and
    • controlling conflicts of interest. [3] 

Avoiding conflicts of interest 

  1. Tax (financial) advisers are required to ensure their objectivity is not impaired by a conflict of interest. In some cases, regardless of arrangements put in place, conflicts of interest will be unmanageable and the only way to adequately manage the conflict will be to avoid it altogether. This will generally require the tax (financial) adviser to decline to act for the client. 

Disclosing conflicts of interest 

  1. Where there is a conflict of interest, tax (financial) advisers should disclose the conflict to their clients. Disclosure should:
  •  be made at the earliest possible opportunity;
  • be specific and meaningful to the client;
  • occur before or when the tax (financial) advice service is provided, but in any case, at a time that allows the client a reasonable time to assess its effect; and
  • refer to the specific service to which the conflict relates.
  1. The form of the disclosure must be sufficient to allow an informed decision to be made about how the conflict may affect the services being provided and about its management.
  2. Where a tax (financial) adviser intends to accept instructions from more than one party to any transaction, it is recommended that, before accepting any form of consideration, the tax (financial) adviser be satisfied that each of the parties is aware that the tax (financial) adviser is intending to act for the others and that there is consent for the tax (financial) adviser to continue to act.
  3. Where one of the parties refuses to provide the requested consent, the tax (financial) adviser should consider declining to act for that party.

 Controlling conflicts of interest 

  1. Controlling conflicts of interest requires a tax (financial) adviser to:  
  • identify the conflicts of interest relating to the tax (financial) adviser practice;
  • assess and evaluate those conflicts; and
  • decide upon, and implement, appropriate responses to those conflicts.
  1. Depending on the circumstances, a tax (financial) adviser may also be able to control a conflict of interest by physically and intellectually separating and isolating persons within the tax (financial) adviser practice who will provide the relevant advice from persons who are privy to material information which may influence the advice. This is sometimes referred to as an ‘ethical wall’ (previously known as a ‘Chinese wall’).
  2. In some cases, ethical walls may be an ineffective form of conflict management, noting that there is a risk of leakage and that there also needs to be an appropriate understanding of written policies and procedures.
  3. In some instances, it may be necessary and appropriate for a tax (financial) adviser to suggest to their client that, notwithstanding any advice provided by the tax (financial) adviser, the client should obtain independent advice in the circumstances.
  4. In all cases, it is recommended that a tax (financial) adviser keep adequate records of the steps taken to control conflicts of interest.

Other techniques for managing conflicts of interest

  1. Additional techniques that may assist a tax (financial) adviser to manage conflicts of interest include:
    • placing a positive onus on employees or anyone else providing relevant services on behalf of the tax (financial) adviser to declare conflicts of interest, including reporting to appropriate people and signing relevant declarations as appropriate;
    • developing a register of private interests (in conjunction with appropriate protocols) and regularly revising the register;
    • reviewing conflict of interest declarations periodically;
    • providing relevant training, including to employees or anyone else providing relevant services on behalf of the tax (financial) adviser, to ensure appropriate awareness and understanding of what constitutes a conflict of interest and how to act in accordance with relevant internal procedures and protocols (including, for example, escalation procedures); and
    • seeking advice from an independent third party, which may include legal advice.

Consequences for failing to comply with Code Item 5

  1. If a tax (financial) adviser does not have in place adequate arrangements for the management of conflicts of interest that may arise in relation to activities that they undertake in their capacity as a tax (financial) adviser, the TPB may find that the tax (financial) adviser has breached the Code and may impose sanctions for that breach.
  2. If a tax (financial) adviser breaches the Code, the TPB may impose one or more of the following sanctions:
  • a written caution
  • an order requiring the registered tax (financial) adviser to do something specified in the order
  • suspension of the tax (financial) adviser’s registration
  • termination of the tax (financial) adviser’s registration.
  1. In addition, the same conduct which may amount to a failure to have adequate arrangements in place for the management of conflicts of interest, under Code Item 5, could constitute a breach of another Code item.
  2. In contrast, it is noted that if an Australian financial services (AFS) licensee or an authorised representative of an AFS licensee fails to comply with the Corporations Act (including the Best interests duty), they may be liable fora civil penalty; [4] and/oran order for compensation for loss or damage suffered by the client. [5] 
  3. Ultimately, determining whether a tax (financial) adviser has complied with their obligations under Code Item 5 will be a question of fact. This means that each situation will need to be considered on a
    case-by-case basis having regard to the particular facts and circumstances.

Comparison with the Corporations Act 2001 (Cth)

  1. The TPB recognises that the obligations of some Australian financial services (AFS) licensees and their representatives under the Corporations Act are similar to some obligations under the TASA.
  2. Ultimately, while compliance with relevant Corporations Act and ASIC requirements will be a relevant factor, it is not conclusive in relation to whether obligations under Code 5 in the TASA have been satisfied.
  3. In particular, it is noted that paragraph 912A(1)(aa) of the Corporations Act 2001 (Corporations Act) provides that a financial services licensee musthave in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative.
  4.  In addition, subsection 961B(1) of the Corporations Act requires that, in the provision of personal advice to a person as a retail client, the provider must act in the best interests of the client in relation to the advice (Best interests duty).
  5. Further, the Best interests duty is supplemented by subsection 961J(1) of the Corporations Act which requires that if the provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of the provider or their related parties (such as licensees, authorised representatives and associates), the provider must give priority to the client’s interests when giving the advice (Conflicts priority rule). [6]
  6. The primary distinction between the obligation under Code Item 5 and the Best interests duty/Conflicts priority rule is that Code Item 5 requires that the tax (financial) adviser has arrangements in place for managing actual or potential conflicts of interest that may arise. In comparison, the Best interests duty/Conflicts priority rule under the Corporations Act is more narrowly focussed on how to deal with an actual conflict of interest.
  7. Further, the Best interests duty/Conflicts priority rule under the Corporations Act merely requires that the client’s interests be prioritised in the event of an actual conflict, whereas Code Item 5 is broader and requires that arrangements must be in place to avoid, control and/or disclose actual or potential conflicts of interest in reation to the activities that a tax (financial) adviser undertakes in their capacity as a tax (financial) adviser. [7]
  8. Another distinction between the obligation under Code Item 5 and the Best interests duty/Conflicts priority rule is that Code Item 5 applies broadly to the personal and professional conduct of all registered tax practitioners (in relation to the activities that a practitioner undertakes in their capacity as a tax practitioner). [8] In comparison, the Best interests duty/Conflicts priority rule under the Corporations Act only applies to those providing personal advice to retail clients).

Practical examples involving Code Item 5

  1. Outlined further below are possible indicative examples for the purpose of illustrating the general application of Code Item 5. In all cases, consideration will need to be given to the specific facts and circumstances.

Example 1

Scenario

Anthony is a long-time client of Lucia’s, a registered tax (financial) adviser. Anthony asks Lucia to assist him to identify an appropriately qualified tax agent to provide advice in relation to tax matters. Lucia is aware of a number of suitable registered tax agents but refers Anthony to XYZ Accounting Pty Ltd because she receives a financial incentive for the referral to this firm. 

Conflict of interest

Lucia has a financial incentive in referring Anthony to XYZ Accounting Pty Ltd as opposed to another registered tax agent and, therefore, has a conflict of interest in the circumstances. 

Managing the conflict of interest

Lucia appropriately identifies and discloses her conflict to Anthony by advising him that she will receive a financial incentive if he engages the services of XYZ Accounting Pty Ltd. In this case, Lucia has satisfied her obligations under Code item 5 by disclosing her conflict of interest to Anthony, when referring him to XYZ Accounting Pty Ltd.

Example 2

Scenario

Christina is a registered tax (financial) adviser and has a number of clients, one of which is Cold Cream, a large ice-cream retailing franchise. Christina has an ownership interest in Cold Cream. Christina is approached by Ice Cold, a rival ice-cream retailing franchise, to provide tax (financial) advice services. 

Conflict of interest

Christina has a potential conflict of interest if she provides tax (financial) advice services to Ice Cold because her ownership interest in Cold Cream could impact her ability to act in the best interests of Ice Cold. 

Managing the conflict of interest

Christina appropriately identifies and discloses her potential conflict to Ice Cold by advising of her ownership interest in Cold Cream. In this case, Christina has satisfied her obligations under Code item 5 by disclosing her potential conflict of interest to Ice Cold. 

Alternative scenario

Christina determines that, in the circumstances, she cannot objectively provide tax (financial) advice services to Ice Cold and therefore the conflict of interest is unmanageable and the only way to adequately manage the conflict will be to avoid it altogether. Accordingly, Christina declines to act for Ice Cold. In this case, Christina has satisfied her obligations under Code item 5 by disclosing her conflict of interest, and avoiding the conflict by declining to act for Ice Cold.

Consultation questions

  1. The TPB is inviting stakeholders to provide specific comment in relation to the following questions: 
  • Do you agree with the general principles outlined in paragraphs 9 to 11?
  • Paragraphs 12 to 22 details some techniques that a tax (financial) adviser may use to manage conflict(s) of interest:
    • Do you agree with the mechanisms provided?
    • What other mechanisms, if any, should be included, and
      • in what circumstances would the techniques be used?
      • what would constitute adequate arrangements for the use of these mechanisms? 
  • In relation to Examples 1 and 2, do you have any comments about:
    • relevance of the scenarios?
    • what would constitute adequate arrangements for managing the conflicts of interest?
  • Are there any additional examples or scenarios that should be incorporated into the information product? If so, please also outline what you consider to be adequate arrangements for managing the conflicts of interest.
     

[1] TPB(I) 19/2014 Code of Professional Conduct – managing conflicts of interest sets out the TPB’s view on the application of Code Item 5 to tax and BAS agents. While TPB(I) 19/2014 was developed specifically for the purpose of assisting registered tax agents and BAS agents, it provides useful guidance for all registered tax practitioners.

[2]For further information, see TPB Explanatory paper TPB (EP) 02/2010 Fit and proper person.

[3]For further information in relation to these mechanisms, see also ASIC Regulatory Guide RG 181: Licensing: Managing conflicts of interest.

[4]See sections 961K and 961Q in the Corporations Act.

[5]See section 961M in the Corporations Act.

[6]Generally, compliance with the Best interests duty under the Corporations Act is met by following the safe harbour steps set out in subsection 961B(2) of the Corporations Act. For further information, see ASIC Regulatory Guides RG 175: Licensing: Financial product advisers - conduct and disclosure and RG 244: Giving information, general advice and scaled advice.

[7]See also paragraphs 9 to 21 in this draft information sheet. In particular, a registered tax practitioner should use their professional judgment to determine the most appropriate method to identify and manage a particular conflict.

[8]For further information on what constitutes a tax (financial) advice service, including facts and circumstances considered in determining whether a client can reasonably be expected to rely on a service being provided, refer to TPB(I) 20/2014: What is a tax (financial) advice service?