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Managing conflicts of interest for tax (financial) advisers

Managing conflicts of interest for tax (financial) advisers

A conflict of interest arises when you have a personal interest, or have a duty to another person which is in conflict with the duty owed to your client in your capacity as a registered tax (financial) adviser.

The Code of Professional Conduct (Code) applies to the conduct of a tax (financial) adviser when providing tax (financial) advice services (as opposed to financial services).

The Code requires you to have adequate arrangements in place for the management of conflicts of interest that may arise in relation to the activities that you undertake in your capacity as a registered tax (financial) adviser. This is item 5 of the Code. However, the Code does not prohibit you from having conflicts of interest.

A conflict of interest may be an actual conflict or a potential conflict and it can arise before you accept an engagement or at any time during the engagement. You have a duty to manage to both actual and potential conflicts of interest.
 

How can you manage conflicts of interest

Examples involving conflicts of interest

Failure to have adequate arrangements

Comparison with the Corporations Act

 

How can you manage conflicts of interest

You should use your professional judgment to determine the most appropriate method to identify and manage a particular conflict of interest. A number of mechanisms could be used, such as:

  • avoid – you may decide to decline to act for the client in situations where you will be unable to manage the conflicts of interest regardless of arrangements put in place
  • control – this involves identifying, assessing, evaluating, deciding and implementing an appropriate response to manage conflicts of interest. For example, depending on the particular circumstances, you may be able to control a conflict of interest by isolating the persons in your practice who will provide the relevant advice from those who are privy to the material information which may influence the advice
  • disclose – you should sufficiently disclose conflicts of interest to your clients in a manner which will enable them to make an informed decision and give them a reasonable time to assess how the conflict may affect the services being provided and about its management.

 

Examples involving conflicts of interest

The following examples illustrate how conflicts of interest could generally be managed in some common situations, noting that consideration will need to be given to the specific facts and circumstances.

Example 1 – Personal gain from a referral creates a conflict of interest

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 – Potential conflict of interest arises from a personal interest

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.

 

Failure to have adequate arrangements

If you do not have adequate arrangements in place for managing conflicts of interest, the TPB may find that you have breached the Code and may impose sanctions for that breach.

 

Comparison with the Corporations Act

The TPB recognises that the Corporations Act 2001 (Corporations Act) requires that:

  • a financial services licensee must have in place adequate arrangements for the management of conflicts of interest that may arise (either wholly or partially) in relation to activities undertaken by them or a representative in the provision of financial services
  • if there are competing interests between the advice provider and the client, the provider must give priority to the client’s interests when giving advice.

However, there are some distinctions between obligations under Code item 5 and those under the Corporations Act which are summarised in the table below:

Code item 5

Corporations Act

Requires arrangements to be in place to manage actual or potential conflicts of interest that may arise

Narrowly focusses on how to deal with an actual conflict of interest

Requires that arrangements must be in place to avoid, control and/or disclose actual or potential conflicts of interest

Requires client’s interests to be prioritised in the event of an actual conflict

Applies broadly to the personal and professional conduct in relation to the activities undertaken as a registered tax (financial) adviser

Applies only to those providing personal advice to retail clients.

 

Further information

 

Last modified: 27 March 2018